June 6, 2013Rexburg, ID

Gary C. Zimmerman, Senior EconomistYelena Takhtamanova, Economist

Federal Reserve Bank of San Francisco

Introduction to the Federal Open Market Committee (FOMC)

and Monetary Policy

Handouts as of 6-3-2013.

Federal Reserve Board Washington, D.C.

Overview

• Goals of monetary policy• Introduction to the FOMC• Behind the scenes at an FOMC meeting• Tools of U.S. monetary policy• The importance of transparency• The role of economists at the Fed

These remarks represent our views and not necessarily those of our colleagues in the Federal Reserve System and the Federal Reserve Bank of San Francisco.

No audio recording, video recording, or photography is permitted without the permission of the presenters. This presentation may not be reproduced in any

form without the express, written permission of the presenters.

Congress has set these two monetary policy goals for the Federal Reserve:

1) Promote maximum sustainable output and employment

2) Promote stable pricesStatement of FOMC’s longer-run goals and policy strategy (1/25/12)• Inflation target of 2 percent• Estimates of the longer-run normal rate of unemployment with a

central tendency of 5.2 to 6 percent

http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm

U.S. Monetary Policy Goals

INTRODUCTION TO THE FOMC

Our National Monetary Policymakers

FOMC Meeting Participants

1) Seven Federal Reserve Board GovernorsAll are always voting members

2) Twelve Federal Reserve Bank PresidentsFRBNY president always votesFour other presidents vote on an annual rotating basis

All FOMC members participate in discussions

2013 FOMC Members: Posted on the Federal Reserve Board of Governors Website

Members Alternate Members

Richard W. Fisher, Dallas Narayana Kocherlakota, Minneapolis Sandra Pianalto, Cleveland Charles I. Plosser, Philadelphia Christine M. Cumming, First Vice President, New York

http://www.federalreserve.gov/monetarypolicy/fomc.htm

Ben S. Bernanke, Board of Governors, ChairmanWilliam C. Dudley, New York, Vice ChairmanJames Bullard, St. LouisElizabeth A. Duke, Board of GovernorsCharles L. Evans, ChicagoEsther L. George, Kansas CityJerome H. Powell, Board of GovernorsSarah Bloom Raskin, Board of GovernorsJeremy C. Stein, Board of GovernorsEric S. Rosengren, BostonDaniel K. Tarullo, Board of GovernorsJanet L. Yellen, Board of Governors

Around the Table!

FOMC members’ backgrounds differ: Many economists, Fed officialsMany with academic experienceSenior government officials, bankers, regulators

Extensive preparation process for each FOMC meeting:

Federal Reserve Board provides briefing materials to all FOMC participants

Each Reserve Bank prepares a briefing for its President prior to an FOMC meeting

Views may differ (a strength of the process)

Experts with Diverse Backgrounds

The Board of Governors

Governors are appointed by the president and confirmed by the U.S. Senate.

Ben S. BernankeChairman

Daniel K. Tarullo

Elizabeth A. DukeJanet L. YellenVice Chair

Sarah Bloom Raskin Jerome H. PowellJeremy C. Stein

BEHIND THE SCENES AT AN FOMC MEETING

• Chairman sets the agenda• Progression of the meeting:

1) Staff reportsOpen market operationsThe economy Policy alternatives

2) 1st go-around: the economy3) 2nd go-around: monetary policy4) The FOMC discusses policy options

and wording of the statement5) 12 “voting” members take a vote6) Statement released at 2:15 pm eastern time

Meeting Agenda

Monetary Policy Decisions

• FOMC members’ focus: – National policy decision– Recent data and developments– Forward looking– Dynamic environment

• Balancing goals:– Single vs. multiple goals– Short term vs. long term

TOOLS OF U.S. MONETARY POLICY

Tools for Achieving Intermediate Policy Objectives

TOOLSInterest Rate Policies:– Open market operations (conv.)

used in conjunction with paying interest on reserves

– Large-scale asset purchases (unconv.) – LSAPs or QEs

– Communications Transparency Forward guidance

Providing Liquidity:– Discount window (conv.)

– New credit facilities (unconv.)

OBJECTIVES

– Target federal funds rate

– Affect long-term rates more directly

– Affect short-term and long-term rates

– Provide liquidity to depository institutions

– Provide liquidity to the financial system

Conventional Tools of Monetary Policy: Target Federal Funds Rate (Feeds Through to Longer-Term Rates)

Unconventional Monetary Policy Actions Increased the Size and Changed the Composition of the Federal Reserve Balance Sheet

THE IMPORTANT ROLE OF TRANSPARENCY

• Transparency helps the public understand the Fed– Its objectives and strategies – Its assessments of the economic outlook

• Forward guidance provides information on the Fed’s expected policy actions

• Benefits of increased transparency and forward guidance– Reduce economic and financial uncertainty – Increase effectiveness of monetary policy– Enhance Fed accountability and legitimacy

Transparency and Forward Guidance: Goals and Benefits

Movements Toward Transparency: Brief History

• 1978: Testimony to Congress• 1994: Announcement of fed funds target, descriptions of the state of the

economy and the rationale for the policy action• 2000: Added “balance of risks” to the outlook• 2002: Released votes of individual members• 2003: Added forward-looking guidance on policy• 2005: Expedited release of FOMC minutes• Nov. 2007: Added numerical forecasts to the FOMC minutes four times

per year, with a 3-year time horizon• Feb. 25, 2009: New website launched by the Board of Governors to

provide information on the Fed's policy actions during the financial crisis • April 27, 2011: Chairman’s press conference added

http://www.federalreserve.gov/monetarypolicy/bst.htm

Movement Toward Transparency:Recent Initiatives

• Statement of FOMC’s longer-run goals and policy strategy (1/25/12)

• Introduction of inflation target• Estimate of longer-run natural rate of unemployment

• Qualitative guidance regarding QE3:• Labor market conditions• Cost/benefit analysis

• Quantitative guidance regarding FOMC expectations for the federal funds rate:• Calendar Date• Numerical Thresholds

Movement Toward Transparency:Recent Initiatives

• Statement of FOMC’s longer-run goals and policy strategy (1/25/12)

• Introduction of inflation target• Estimate of longer-run natural rate of unemployment

• Qualitative guidance regarding QE3:• Labor market conditions• Cost/benefit analysis

• Quantitative guidance regarding FOMC expectations for the federal funds rate:• Calendar Date• Numerical Thresholds

• 08/11: “mid-2013”• 01/12: “late 2014”• 09/12: “mid-2015”• 12/12: calendar date-based guidance

replaced with numerical thresholds

Forward Guidance for the Federal Funds Rate: Information About Expected “Liftoff date”

Exceptionally low range for the federal funds rate will be appropriate for at least as long as:

1. The unemployment rate remains above 6-1/2 percent2. Inflation between one and two years ahead is projected

to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and

3. Longer-term inflation expectations continue to be well anchored

Forward Guidance: Introduction of Numerical Thresholds (“6-1/2 2-1/2 Policy”) on 12/12/12

Quantitative Guidance Regarding FOMC Expectations for Future Monetary Policy

YEAR: 2013 2014 2015 2016

13

12

11

10

9

8

7

6

5

4

3

2

1

23

13

1

March 2013 Meeting Number of Participants

Appropriate timing of policy firming

March 20, 2013 Projections. Next Projections: June 19, 2013.

THE ROLE OF ECONOMISTS AT THE FED

Who The Fed Economists Are

Fed is one of the largest U.S. employers of economists

• Board has over 200 economists• 12 Reserve Banks have about 275 economists• B.A./M.A. level Research Associates/Analysts

Economists have diverse areas of focus:• Macroeconomics (produce forecasts)• Banking/Financial• International• Applied Micro/Regional (produce the Beige Book)

• Conduct and publish economic researchExample: http://www.frbsf.org/economics/

• Produce economic briefings for FOMC members and senior management

– Intense briefing process– Independent– Economists may not always agree – a strength of

the process

• Check out FOMC minutes to see discussions of macro, financial, international, and regional conditions http://www.federalreserve.gov/newsevents/press/monetary/20120403a.htm

What The Fed Economists Do

Much of The FOMC Analysis Is Published!

Contributions of economic research to the President often become:

• Publications and web products– FedViews Forecast– Economic Letters– Working Papers– Beige Book Summary– 12L Economic Trends

• Academic journal articles

Thank You!

Gary C. Zimmerman, Senior EconomistYelena Takhtamanova, Economist

Questions?

FRBSF Resources

www.frbsf.org/economics/

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