Fed Governor Brainard January 2017 Speech

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Fiscal policy has attracted the attention of inflation watchers

“Among the many factors that can affect the aggregate economy and, by extension, monetary policy, a possible shift in fiscal policy has attracted the attention of both economic forecasters and financial markets of late. Among forecasters surveyed by Blue Chip Economic Indicators, for 2017, 44 percent indicated that they had raised their forecast of inflation and 47 percent had raised their forecast of gross domestic product (GDP) growth because of the recent U.S. election results, although on average forecast changes were modest. Markets have also reacted, and many have interpreted these changes as reflecting expectations of more expansionary fiscal policy in the coming years than previously expected.”

It matters whether fiscal deficits increase aggregate supply

“In this regard, it matters importantly whether increased fiscal deficits predominantly raise aggregate demand or also expand the supply potential of the economy more broadly. Changes in fiscal policy that raise the level or growth rate of productivity or that induce greater labor force participation and higher levels of skill and education in the workforce raise the nation’s productive capacity and result in more sustainable increases in output and living standards.”

The trajectory of federal debt to GDP can also influence the effects of fiscal policy

” the trajectory of federal government debt relative to GDP and views regarding the debt’s sustainability can also influence the effects of fiscal policy. Research suggests that increases in the debt-to-GDP ratio cause long-term interest rates to rise.11 All else being equal, higher long-term interest rates reduce spending on interest-sensitive goods, possibly damping the direct effect of fiscal expansion on economic activity.”

Full employment is within reach

“With any future change in fiscal policy quite uncertain, monetary policy will be guided by the current state of the economy, the underlying momentum of economic activity and inflation, the level of the neutral rate, and the balance of macroeconomic risks. In recent quarters, the data have painted a consistent picture of a resilient and gently improving U.S. economy. Following a year in which the unemployment rate remained stable while labor force participation increased, we have seen in the past quarter a further reduction in the unemployment rate. Overall, I am pleased to see that full employment is within reach and could prove sustainable with the right policy mix.”

I have been encouraged by gradual progress toward our inflation target

“Following a long period of stubbornly below-target inflation, I have been encouraged by recent signs of gradual progress toward our inflation target, as the effects of earlier dollar appreciation and oil price declines appear to be waning. Over the 12-month period ending in November, core personal consumption expenditures prices increased 1.6 percent. This rate is still noticeably below 2 percent, but it is up 1/4 percentage point from a year earlier.”

If fiscal policy leads to a more rapid elimination of slack policy adjustment would be undertaken more rapidly

” if fiscal policy changes lead to a more rapid elimination of slack, policy adjustment would, all else being equal, likely be more rapid than otherwise, with the conditions the FOMC has set for a cessation of reinvestments of principal payments on existing securities holdings being met sooner than they otherwise would have been.”

The appropriate level of fed funds depends on the neutral rate

“When the economy eventually returns to full employment and 2 percent inflation, the appropriate level of the federal funds rate will depend on the level of the neutral rate, which is expected to move up only modestly in coming years from its current low level.14 On the one hand, if progress on employment and inflation occurs more quickly than I anticipate, foreign risks recede, and the fiscal impulse rises, the neutral rate might rise more rapidly”