A Time of Testing

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A Time of Testing

Narayana Kocherlakota - President
Federal Reserve Bank of Minneapolis

Thank you for that generous introduction, and thanks to the Rotary Club of Houghton for hosting this event, and especially to Michigan Technological University for inviting me here today. Also, a thank you to the members of the local business community who joined me earlier this morning to discuss business conditions in the Upper Peninsula. And finally, I also appreciated the opportunity to meet with some economics and finance students at the university this morning. As a former professor, it is always gratifying to be reminded of the curiosity and ambition of our students. All of these conversations are valuable to me, and I hold them whenever I travel throughout the Ninth District. The information that I receive at such meetings is valuable to me as a policymaker, as it provides real-time insights into the state of the economy.

The title of my speech today is “A Time of Testing.” Paul Volcker, then Chairman of the Federal Reserve Board of Governors, used the same title for a speech that he gave on October 9, 1979. Chairman Volcker intended his title to underscore that monetary policymakers in 1979 were confronted with a severe test in the form of high inflation and high inflation expectations. I use the title today to underscore that monetary policymakers in 2013 are again confronted with a severe test—but this time a test created by low employmentand low employment expectations. Back in 1979, Chairman Volcker said that “this is a time of testing—a testing not only of our capacity collectively to reach coherent and intelligent policies, but to stick with them”1 [italics mine]. My theme today is that his powerful phrase applies with equal force to our current situation.

Let me give you a brief roadmap of where I plan to take you today.

First, I will show you data that depict the painfully slow pace of recovery in the U.S. labor market. Second, I will show you data that demonstrate that there is considerable monetary policy capacity with which to address this problem. Third, I will take you back to 1979 and describe the nature of the problem that monetary policymakers faced then. I will describe how they dealt with those problems by using what I would call goal-oriented monetary policy. Fourth, I will argue that there are several key parallels between 1979 and 2013. Given those parallels, monetary policymakers can best deal with the current labor market problems by also adopting a goal-oriented approach to monetary policy. Unlike 1979, though, the goal-oriented approach to monetary policy will focus on improving labor market outcomes, as opposed to lowering inflation.

Throughout my remarks, I’ll be making reference to the Federal Open Market Committee, or FOMC for short. The Committee currently consists of the six governors of the Federal Reserve System and the 12 presidents of the various regional Federal Reserve Banks, including me. Its job is to set monetary policy for the United States.

As you listen to me today, please keep in mind that my views are not necessarily those of anyone else in the Federal Reserve System, including other Federal Open Market Committee participants.

Evolution of Labor Market Outcomes since 2007

I will begin by documenting the disturbing state of the labor market. I’ll start by showing you data on the evolution of the unemployment rate. In March 2007, the unemployment rate was 4.4 percent. It rose slowly throughout 2007 to reach 5.0 percent by the end of the year. The National Bureau of Economic Research dates the Great Recession as having begun in that month. In the wake of the recession, the unemployment rate reached a peak of 10 percent in October 2009.

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Since that date—almost four years ago!—the unemployment rate has fallen slowly to 7.3 percent. This is still unusually high relative to the past quarter century or so: Between 1986 and 2007, the unemployment rate was only higher than 7.3 percent in 1992. The current unemployment rate is also high relative to most forecasts of its expected long-run level, including those made by the FOMC. Basically, an unemployment rate of 7.3 percent means that the U.S. labor market is far from healthy.

But I would say that this measure—troubling as it is—overstates the improvement in the U.S. labor market. To estimate the unemployment rate, the Census Bureau asks people two questions: Are you working? And, if not, have you looked for work in the past four weeks? The unemployment rate measures the ratio of the second number—the recent job searchers—to the sum of the two numbers (the recent job searchers and the workers). This means that the unemployment rate can decline for two reasons: because more people are finding work or because fewer people are choosing not to look for work. Most of the declines in the unemployment rate since October 2009 have occurred because the fraction of people who are choosing to look for work has fallen.

This characterization is borne out if we look at the evolution of the fraction of people over the age of 16 who have a job—what’s called the employment-to-population ratio. In March 2007, the employment-to-population ratio was over 63 percent. The employment-to-population ratio fell sharply during the Great Recession and bottomed out at just over 58 percent in mid-2011. The percentage has risen little from this low point and remains lower than at any time between 1986 and 2007.

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It is true that, even without the Great Recession, demographic forces would have led to some decline in the employment-to-population ratio since 2007. As the baby boom birth cohort—born between 1946 and 1964—ages, the fraction of retirees in the population grows steadily. But these demographic forces are simply too small to account for much of the decline in the employment-to-population ratio that I’ve described. One way to see this—but not the only way—is to focus on people who are outside the normal retirement age. Here, I’ve plotted the fraction of the population aged 25 to 54 who have a job. This ratio has improved somewhat more from its low point, but also remains lower than at any time between 1986 and 2007.

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To summarize what we learn from the charts: The good news is that the labor market has improved since the end of the Great Recession. The bad news is that the rate of improvement over the past four years has been painfully slow. As a consequence, the condition of the labor market remains weak.

There are two aspects of the labor market situation that are worth emphasizing. First, the weak labor market represents considerable hardship for a large number of Americans, both in economic terms and in psychological terms. Second, it represents a significant waste of resources for the national economy, because our country is failing to use a large fraction of our human potential. For both of these reasons, I believe that those of us who are charged with making economic policy should do whatever we can to facilitate a faster rate of improvement in labor market conditions.

Potential Usefulness of Monetary Policy

I have shown you evidence that the labor market is currently weak. But the charts also show that the labor market has been weak for several years. Some observers have concluded from this persistence that monetary policy cannot ameliorate the problems in the labor market. One of my main points today is that this conclusion of monetary policy impotence is at odds with the behavior of inflation.

To understand this point, it’s useful to look at the behavior of personal consumption expenditure (PCE) inflation over the past few years. Just to be clear, this is a measure of inflation that incorporates the prices of all goods and services, including food and energy. Since the beginning of the Great Recession in December 2007, the PCE inflation rate has averaged around 1.5 percent. This is noticeably below the FOMC’s target inflation rate of 2 percent per year. And the outlook for future inflation is similarly subdued. Thus, earlier this year, the Congressional Budget Office projected that PCE inflation will remain below the FOMC’s target of 2 percent until the year 2018.

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These low levels of inflation tell us that monetary policy can be useful in increasing the rate of improvement in the labor market. Here’s what I mean. At a basic level, monetary stimulus increases the demand for goods among households and firms. This higher demand for goods tends to push upward on both prices and employment. Hence, the downside with using monetary policy to stimulate employment is that, when employment is near its maximum level, further stimulus can lead to unduly high inflation. But the data show that over the past few years inflation has been below the FOMC’s target of 2 percent. It’s expected to remain below desirable levels for years to come. These low levels of inflation show that the FOMC has a lot of room to provide much needed stimulus to the labor market.

Learning from 1979

I have argued that there is monetary policy capacity to ameliorate the severe weakness in U.S. labor market conditions. I next turn to the question of how best to use that capacity. In answering this question, I believe that it is useful to consider how the Federal Open Market Committee successfully solved the problem of high inflation back in the early 1980s.

Earlier, I referred to a speech given by Paul Volcker in October 1979, early in his term as Chairman of the FOMC. At that time, the annual inflation rate was over 9 percent, after rising throughout the prior 15 years. Many observers felt that monetary policy was powerless to roll back (or possibly even to stem) this steady increase. As Chairman Volcker noted in his speech, “Some would argue that inflation is so bound up with ... deep-seated forces that monetary and fiscal policies are impotent,” and that “we face impossible choices between inflation and prosperity.”2 Indeed, only 10 days before Chairman Volcker spoke, former Federal Reserve Chairman Arthur Burns had given a speech of his own in which he argued that the increase in inflation was grounded in “philosophic and political currents that have been transforming economic life in the United States ... since the 1930s.”3

The perception that monetary policymakers could not (or would not) address the problem of high inflation was actually a key part of the problem facing the FOMC in 1979. If the public believes that it is impossible to reduce inflation, then the public will expect high inflation to persist or even to increase. Those high inflation expectations themselves generate high inflation. After all, if businesses expect high inflation, they will raise their prices more. And, if workers expect high inflation, they will ask for higher wage increases. In this way, the perception of monetary policy impotence in 1979 was itself a key force in generating higher inflation.

Faced with this challenging issue, the FOMC followed what I would term goal-oriented monetary policy. This approach had two parts. First, the Committee formulated and communicated a clear goal: It intended to bring inflation down as quickly as possible. Second, on an ongoing basis, the Committee did whatever it took to achieve that goal, even if those actions had short-term economic costs. In particular, the Committee maintained tight monetary policy so as to push down inflation, even as interest rates and the unemployment rate soared to post-World War II highs. By following a goal-oriented policy, the FOMC was successful in brnging down both inflation and inflation expectations. Indeed, as early as late 1983, inflation had fallen below 4 percent.

In hindsight, I think that it is clear why the FOMC was so successful. With goal-oriented policy, communications and actions work together in a powerful fashion. Communications tell the public where the FOMC is taking the economy. Then, every subsequent action gives the public confidence that the Committee is willing and able to take the economy in that direction. Actions and communications operate together to destroy the dangerous perception of monetary policy ineffectiveness.

Goal-Oriented Policy in 2013

I’ve spent a lot of time talking about 1979, because I see three key parallels between the economic situation in 1979 and the economic situation in 2013. First, just like in 1979, the Federal Open Market Committee faces a challenging macroeconomic problem—although this time, the problem is stubbornly low employment as opposed to stubbornly high inflation. Second, there is a widespread perception that monetary policymakers lack either the tools or the will to solve this problem.

And third, the perception of monetary policy ineffectiveness is itself a key factor in generating the problem. Let me elaborate on this last point. If the public thinks that monetary policy is ineffective, then it will expect relatively weak macroeconomic conditions in the future. But these expectations about the future have a direct impact on current macroeconomic outcomes. If households expect their incomes to be low in the future, they will save more and spend less today. If businesses expect low future demand for their products, they will invest less today and hire fewer people today. In this way, any perceptions of future FOMC ineffectiveness in generating favorable macroeconomic outcomes are hurting current employment.

We’ve seen how the FOMC dealt with its problems in 1979 by adopting a goal-oriented approach to monetary policy. Given the parallels between 1979 and 2013, I believe that a goal-oriented approach would be useful again. In 1979, the FOMC’s goal was to return inflation to low levels as rapidly as it could. In 2013, the FOMC’s goal should be to return employment to its maximal level as rapidly as it can, while still keeping inflation close to, although possibly temporarily above, the target of 2 percent. Note that, by keeping inflation expectations well-anchored, the inflation requirement ensures that monetary policy remains effective as a form of employment stimulus.

But, as Paul Volcker said in his 1979 speech, it is not enough to formulate or communicate a goal. The Committee has to stick to its formulated approach—that is, it must do whatever it takes to achieve its communicated goal. In the early 1980s, doing whatever it took meant being willing to keep money tight, even though interest rates and the unemployment rate rose to unusual heights. By doing whatever it took to achieve its goal, despite these short-term costs, the FOMC was able to bring down inflation and inflation expectations.

Doing whatever it takes in the next few years will mean something different. It will mean that the FOMC is willing to continue to use the unconventional monetary policy tools that it has employed in the past few years. Indeed, it will mean that the FOMC is willing to use any of its congressionally authorized tools to achieve the goal of higher employment, no matter how unconventional those tools might be. Moreover, doing whatever it takes will mean keeping a historically unusual amount of monetary stimulus in place—and possibly providing more stimulus—even as:

• Interest rates remain near historic lows.
• Economic growth rises above historical averages.
• Per capita employment begins to rise appreciably.
• Asset prices rise to unusually high levels, leading to concerns about “bubbles.”
• The medium-term inflation outlook rises temporarily above 2 percent.
  

It may not be easy to stick to this path. But I anticipate that the benefits of doing so, in terms of employment gains, will be significant.

I have been emphasizing the similarities between the FOMC’s situation in 1979 and its situation in 2013. But I should also emphasize one critical difference between the two situations. In 1979, the FOMC was faced with what proved to be a very painful trade-off between keeping inflation low and keeping employment high. In 2013, there is no such trade-off. As I showed you earlier, the impact of the Great Recession has left both prices and employment too low. Thus, the goal-oriented policy that I’ve described should also help the FOMC do better with respect to its objective of keeping inflation close to 2 percent.

Before I wrap up, I’ll note that the FOMC’s current policy strategy differs in important ways from the goal-oriented approach that I’m recommending today. In its most recent statement, the Committee says that appropriate monetary policy should lead the unemployment rate to decline gradually and lead the inflation rate to be below 2 percent over the medium term. Under a goal-oriented approach to policy, the FOMC would view a “gradual decline” in the unemployment rate as being undesirably slow, given that the medium-term outlook for inflation is so low. Hence, the Committee’s outlook would trigger a decision to provide more monetary stimulus.

Conclusions

My speech is called “A Time of Testing.”

Five years ago, in September 2008, as the nation and the world spiraled into a financial crisis, it was obvious that economic policymakers faced a time of testing. Thanks in large part to Chairman Bernanke’s strong and imaginative leadership, the Federal Reserve System was able to pass that challenging test. The System’s actions in the fall of 2008 and the first half of 2009 were critical in eliminating what was the nontrivial risk of a second Great Depression, with unemployment rates closer to 25 percent than to 10 percent.

My message today is that September 2013 is another time of testing. Over six years after the national unemployment rate first began its ascent, the labor market remains disturbingly weak. The good news is that, with low inflation, the FOMC has considerable monetary policy capacity at its disposal with which to address this problem.

The FOMC’s test today is to figure out how best to deploy this capacity. The answer lies in taking two steps. The first step is to communicate that our goal is to accomplish a fast return to maximal employment while keeping inflation close to, although possibly temporarily above, the target of 2 percent. The second step is to do whatever it takes, on an ongoing basis, to achieve that goal. A goal-oriented approach to monetary policy greatly reduced inflation in the early 1980s. Adopting such an approach in our own time would improve labor market outcomes.

Thank you. I look forward to taking your questions.

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明尼阿波利斯联储行长那拉亚纳-科薛拉克塔(Narayana Kocherlakota)周四称，美联储应采取措施增加量化宽松规模，而并非削减其规模。

　　科薛拉克塔表示，低通胀表明美联储理事有“很大余地为就业市场提供其十分需要的刺激性措施”。他呼吁美联储设定一个目标，以便尽可能快地将就业率恢复到最高水平；与此同时，该目标还需有助于美联储将通胀率维持在接近于2%目标的水平。他还补充道，货币政策并非虚弱无力的。

　　科薛拉克塔并非美国联邦公开市场委员会(FOMC)今年的轮值投票委员。在过去几天时间里，他已从担心高通胀的鹰派主脑人物变成了资产购买计划和宽松货币政策立场的强力支持者之一。他表示，就连有关资产泡沫的担忧情绪也不应推迟美联储推出更多刺激性措施的时间。

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　　　　导读：财经撰稿人凯西(Michael Casey)在MarketWatch撰文指出，联储量化宽松的真正危害在于扭曲了市场行情，破坏了市场在正常情况下参与和监督经济决策的功能。

　　以下即凯西的评论文章全文：

　　当伯南克上周宣布，政府关门的威胁“将在金融市场和经济领域产生非常严峻的后果”，他实际上是等于明确承认，即将爆发的议会预算大战对联储暂不减退债券购买计划的决定是有实质性影响的。

　　可是他没有提到自己的机构在华盛顿政治机能紊乱，以及美国财政名声随之恶化的过程当中所扮演的角色。

　　没有哪位联储官员愿意承认，但是无意识当中，央行确实又在客观上发挥了怂恿议员们鲁莽胡为的作用。

　　比如说，一个最典型的例子就是，联储坚定执行超级宽松的货币政策，而这在无意识之下其实是破坏了这个国家两大最重要机构股市和债市的重要作用。很大程度上，正是由于联储一直持续的量化宽松政策，股市现在处于距离历史最高纪录不远的地方，而十年期国债收益率则远离今年夏季一度曾经无限逼近的3%关口。这种过度乐观的情绪之下，市场自然很难正常履行职能，像应该的那样向议会传达他们的行为是否合适的信号了。

　　我们可以回顾一下议会不良资产处置计划投票的前后，这会让我们很容易就能够理解一旦市场发挥其影响力，效力有多么可观。2008年9月29日，众议院投票反对7000亿美元的不良资产处置计划救援基金，接下来的五天当中，由于投资者对金融崩溃前景的恐惧，道琼斯(15328.3, 55.04, 0.36%)工业平均指数大跌了7%。不到一周内，三十五位议员立场急转弯，使得第二次投票当中，救援计划顺利通过。

　　毋庸赘言，一旦众议院当中的共和党人兑现自己之前的威胁，不提高债务上限，股市完全可能再次上演类似的跳水行情，如果共和党人的决定导致国债违约，不必说跌势还会更惨。现在不清楚的只是，股市到底要惨烈到怎样的程度，才可以让足够数量的新茶党放弃为了废止奥巴马医保不惜让政府关张的想法。

　　不过，可以想见的是，一旦市场面对着即将到来的风险发出绝望的叫喊，共和党领导层如众议院议长博纳和众议院多数党领袖坎托还是会想办法去说服自己这一派的狂热者的，毕竟无论在参议院还是在白宫，颠覆奥巴马医保都是一个不可能完成的任务。关键在于，这些经验丰富的政治家们必须确定，从自己的选举地位和市场的反应看来，支持，而不是反对这些极端主义分子意味着自己将会失去更多。

　　可麻烦的是，投资者现在正向着另一方向前进。他们最大的问题其实是来自如何处理联储通过债券采购每个月向金融系统注入的850亿美元额外流动性。

　　老话说得好，千万不要和联储作对。因此，在长达五年，数量超过3万亿美元的量化宽松之下，投资者感受到了巨大的压力，他们必须去购买任何能够提供一点收益率的东西。在这种必要性面前，其他任何因素都显得那么苍白无力，无论是叙利亚的冲突还是中国经济增长减速，甚至是政府关张的风险都算不得什么了。

　　换言之，联储在无意当中就稀释了市场迫使议员们保持警惕的能力。这可不是一件小事。从很久以前，经济学家们就意识到了市场在确定政策优先性方面的重要作用。比如说，历来就有“债市义务警员”的说法，意思是债市可以在客观上发挥约束政府，让他们在财政上不敢过分大手大脚的作用。事实上，这种由市场来执行的纪律正是自由市场民主机能不可或缺的一部分。

　　当然，联储并不是有意要把局面搞乱的。只是，当他们面对着各种经济方面的不利因素，又必须执行自己确保充分就业和价格稳定的任务，于是乎只有选择不计后果的货币刺激，而暂时顾不上由此引发的结构性问题了。

　　可是，如果他们坚持忽视自己的政策对市场所造成的扭曲，就等于在冒持续破坏我们的经济和政治基础的风险了。从新兴市场货币到贵金属，从工业商品到股票价格，都在联储的影响范围之内，可是联储自己却表现出一副似乎这些都无所谓的样子。

　　一点点地，他们的姿态就将全球最有权力的央行锁定在一种不健康的，和市场互相依赖的关系当中，在这种关系之下，一方采取行动的时候，总是抱着另外一方会如何如何的预期。

　　正因如此，我们应该说，其实量化宽松所造成的最大威胁并不是通货膨胀，全球经济的疲软自然能够应对这方面的压力——最大的威胁在于，它正在缓慢地，但又难以察觉地破坏着我们政府运作的方法。

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如果未来是结构型的失业，也许印再多的钱也不管用。