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02 26 2016 | by Victor Xing | Central Banks

Governor Brainard on inflation and policy coordination

Governor Brainard: data dependent vs. data point dependent

Governor Brainard’s speech at today’s Monetary Policy Forum focused on international monetary policy coordination – a long-standing position supported by the IMF.  In the past, other FED policymakers had expressed varying opinions on the topic – St. Louis Fed President Bullard commented in a 2014 speech that policymakers should follow good policy focused on domestic variables, and the gains from international monetary policy coordination are small.  Vice Chair Fischer acknowledged dollar’s role in the global economy in a subsequent speech, but he emphasized that Federal Reserve’s responsibility first and foremost “is to keep our own house in order.”

Nevertheless, Governor Brainard structured her arguments around disinflation, the long-running bane of global central bank policymakers, and the speech helped illustrate her views on appropriate monetary policy.

Federal Reserve Governor Brainard delivers remarks on ''Coming of Age in the Great Recession'' at the Federal Reserve's ninth biennial Community Development Research Conference focusing on economic mobility in Washington April 2, 2015. REUTERS/Yuri Gripas
Federal Reserve Governor Brainard in 2015. Photo credit: Reuters

Speech: What Happened to the Great Divergence? [link]

  • Financial conditions tightening
    • Changes in dollar valuation, equity valuation and long-term yields over the past year and half has the equivalent of an additional increase of over 75 bps in federal funds rate
  • The strong January 2016 PCE data and whether was enough to give policymakers confidence that inflation is returning
    • Q&A answer: “I think that’s kind of taking ‘data dependency’ to the extreme of data point dependency”
    • Q&A answer: “Obviously we’re looking for a pattern in the data”
  • High premium on evidence that actual inflation is firming sustainability
    • Deterioration in inflation expectations
    • Weakened link between labor market tightening and inflation (questioning the Phillips curve)
    • Asymmetry of policy in the vicinity of the zero lower bound (risk management argument)
  • Factors that limited policy divergence
    • The “sharp repeated declines” in oil prices that is expected to eventually fade
    • A more persistent source of policy convergence: decline in the neutral rate of interest, which is likely due to:
      • Slower productivity
      • Slower labor force growth
      • Heightened sensitivity to risk
  • “Somewhat persistent” growth slowdown in China
    • Risks of further ripple effects through the global economy
    • Heightened spillovers from weaker foreign economies and lower neutral rate could result in a shallower policy path
  • Policy path divergence has narrowed between the Federal Reserve and foreign central banks
    • Differences among the major economies are smaller in terms of realized and expected inflation (versus resource utilization)
    • All inflation rates across the U.S., U.K., euro area, and Japan are “well below target”
    • Core PCE inflation has come in consistently under the Federal Reserve’s 2% target and “does not look very different from inflation in economies that are expected to maintain accommodative monetary policy for some time”
    • “Notable similarities” in the recent decline in market-based inflation expectations across U.S., eurozone, and Japan (U.K. has seen a much more modest decline)
    • Policy divergence to remain more limited than expected if core inflation remains below target in all major advanced economies and inflation expectations that remain under pressure

Views expressed by Governor Brainard can (and should) be market-moving – her dovish comments on April 2nd 2015 and again on February 3rd preceded the Committee’s subsequent dovish tilt, and her “watchful waiting” policy stance was also shared by Chair Yellen during the semi-annual Monetary Policy Report.

Next article02 26 2016 | by Victor Xing | Economics

January PCE: services inflation surge as energy stabilize