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October 7, 2020

Key Takeaways from President Williams’s Speech on the Longer‑Run Framework

On Wednesday, October 7, New York Fed President John Williams spoke at the Hoover Institution about the Fed’s monetary policy framework, published in August.

He said:

“The new policy framework represents a substantial evolution of the FOMC’s thinking and approach since the Committee published its first framework statement in 2012.”

“Together, these changes position us to deliver on our dual mandate goals in a world of very low r-star and persistently low inflation.”

“While our monetary policy approach has shifted, our fundamental goals have not. The Fed has two goals set by Congress: maximum employment and price stability.”

President Williams began his remarks by highlighting three takeaways that have informed the FOMC’s approach to policy. He pointed to “the secular decline in the neutral rate of interest, or r-star, which has brought neutral real interest rates to near zero in the United States,” the downward drift in inflation expectations in recent years, and “structural changes” in the labor market, which “have greatly expanded the level of employment that can be maintained without creating inflationary pressures.”

Turning to how the FOMC’s approach to monetary policy has shifted, he said: “Perhaps the most notable change we announced to our framework was explicitly describing success in terms of achieving inflation that averages 2 percent over time.” He also remarked, “A second tangible evolution in our approach is that we made explicit that in seeking maximum employment, we are focused on eliminating shortfalls from that goal.”

Discussing the economy, he said: “In thinking about the future path of policy, it is important to recognize that the pandemic engenders a unique and highly uncertain economic outlook.” President Williams went on to connect September’s FOMC statement with “key elements of the new policy framework.” He said, “this forward guidance clearly describes the key elements of the FOMC’s reaction function to economic developments and a changing outlook.” He concluded by saying: “These changes to the framework mean that we are well positioned to deliver on our dual mandate goals and support a strong and sustained economic recovery.”

Read the full speech.

This article was originally published by the New York Fed on Medium.

The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.


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