Introduction to the Federal Open Market Committee (FOMC) and Monetary Policy June 6, 2013 Rexburg, ID

Gary C. Zimmerman, Senior Economist Yelena Takhtamanova, Economist Federal Reserve Bank of San Francisco 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.

U.S. Monetary Policy Goals

Congress has set these two monetary policy goals for the Federal Reserve: 1) Promote maximum sustainable output and employment 2) Promote stable prices

Statement 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 INTRODUCTION TO THE FOMC Our National Monetary Policymakers

FOMC Meeting Participants 1) Seven Federal Reserve Board Governors All are always voting members 2) Twelve Federal Reserve Bank Presidents FRBNY president always votes Four 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 Ben S. Bernanke, Board of Governors, Richard W. Fisher, Dallas Chairman Narayana Kocherlakota, Minneapolis William C. Dudley, New York, Vice Sandra Pianalto, Cleveland Chairman Charles I. Plosser, Philadelphia James Bullard, St. Louis Christine M. Cumming, First Vice Elizabeth A. Duke, Board of Governors President, New York Charles L. Evans, Chicago Esther L. George, Kansas City Jerome H. Powell, Board of Governors Sarah Bloom Raskin, Board of Governors Jeremy C. Stein, Board of Governors Eric S. Rosengren, Boston Daniel K. Tarullo, Board of Governors Janet L. Yellen, Board of Governors

http://www.federalreserve.gov/monetarypolicy/fomc.htm Around the Table! Experts with Diverse Backgrounds

FOMC members’ backgrounds differ: Many economists, Fed officials Many with academic experience Senior 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) The Board of Governors

Ben S. Bernanke Janet L. Yellen Elizabeth A. Duke Chairman Vice Chair

Sarah Bloom Raskin Daniel K. Tarullo Jeremy C. Stein Jerome H. Powell Governors are appointed by the president and confirmed by the U.S. Senate. BEHIND THE SCENES AT AN FOMC MEETING Meeting Agenda

• Chairman sets the agenda • Progression of the meeting: 1) Staff reports Open market operations The economy Policy alternatives 2) 1st go-around: the economy 3) 2nd go-around: monetary policy 4) The FOMC discusses policy options and wording of the statement 5) 12 “voting” members take a vote 6) Statement released at 2:15 pm eastern time 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

TOOLS OBJECTIVES Interest Rate Policies: – Open market operations (conv.) – Target federal funds rate used in conjunction with paying interest on reserves – Large-scale asset purchases – Affect long-term rates (unconv.) – LSAPs or QEs more directly – Communications – Affect short-term and . Transparency long-term rates . Forward guidance

Providing Liquidity: – Discount window (conv.) – Provide liquidity to depository institutions – Provide liquidity to the – New credit facilities (unconv.) 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 and Forward Guidance: Goals and Benefits

• 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 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

• 08/11: “mid-2013” • 01/12: “late 2014” • 09/12: “mid-2015” • 12/12: calendar date-based guidance replaced with numerical thresholds Forward Guidance: Introduction of Numerical Thresholds (“6-1/2 2-1/2 Policy”) on 12/12/12

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 percent 2. 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 Quantitative Guidance Regarding FOMC Expectations for Future Monetary Policy

March 2013 Meeting Number of Participants 13 Appropriate timing of 13 policy firming 12 11 10 9 8 7 6 5 3 4 2 3 1 2 1

YEAR: 2013 2014 2015 2016 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) What The Fed Economists Do

• Conduct and publish economic research Example: 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 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 Questions?

Thank You!

Gary C. Zimmerman, Senior Economist Yelena Takhtamanova, Economist FRBSF Resources www.frbsf.org/economics/ You Can Follow FRBSF on Facebook and Twitter