Mortgage lenders continue to be extremely risk averse in extending new credit, and mortgage availability to those with lower credit scores is still significantly constrained. I don’t anticipate that this situation will change in a material way any time soon. Second, because motor vehicle sales are now close to their pre-recession levels, the future growth impetus from this cyclical sector will likely also be restrained going forward. Third, growth in the rest of the world has slowed slightly and the dollar has appreciated somewhat. This will limit the growth in U.S. exports, and suggests that the trade sector is unlikely to provide much support to growth over the next year or two. Inflation: lower now, but likely to drift gradually higher next year Let me now turn to discuss the inflation outlook. Inflation has been running below the Federal Reserve’s objective of a 2 percent annualized rate for the personal consumption expenditures (PCE) deflator. For example, over the past twelve months, the overall PCE deflator has risen by 1.4 percent, and the core PCE deflator, which excludes food and energy, has increased by 1.6 percent. Recently, the overall index has been pulled down by sharply lower oil and gasoline prices. Also, I expect that core goods prices will be held down somewhat over the near-term by the recent appreciation of the U.S. dollar. Nevertheless, I expect inflation will begin to move back towards our 2 percent objective in 2015.
These uncertainties imply that no single approach is likely to be entirely reliable. The inherent uncertainty faced by the central bank cannot simply be wished away. Reliance on a single indicator or forecast, or a single model of the economy or view of the world, would, in these circumstances, be extremely unwise. The strategy needs to incorporate the full range of relevant indicators and assess them in the context of a variety of different models. In this respect, the two pillars complement one another. They allow for a structured cross-checking of the evidence and analysis underlying policy decisions, encompass all information and allow for various views of the structure of the economy. The academic literature and other external commentators are slowly coming to recognise the importance of “robustness” in monetary policymaking - something which I believe has been understood by central bankers for some time. A successful monetary policy is not one that performs “optimally” in the context of a specific model or given a particular view of the world. In the light of our limited understanding of how the economy works, no single model is reliable enough. Rather given the great uncertainty faced by central banks - a successful monetary policy should perform well in a broad range of possible situations and across a variety of models or views of the world, each one of which may capture important aspects of actual economic behaviour or may, ex post, turn out to be close to reality. Monetary policymaking is therefore complex.