Confidence, Expectations and Implications for Monetary Policy

I believe our economy’s performance is driven in important ways by sentiment, that is, the outlook and beliefs of consumers and businesses. At present, I’m concerned about increasing uncertainty and fragile business confidence. In the presence of fragile confidence, a central bank can aim to deliver on our mandates for maximum employment and price stability in order to create a stable environment for businesses and consumers. At present, we are doing well on our employment mandate. With respect to price stability, core PCE inflation has been running persistently below our 2 percent target. I’m torn as to how large a concern this presents. Most companies in most industries have settled pricing routines that are slow to change. These routines begin with inflation expectations and are also grounded in what firms anticipate about their competitors’ and customers’ reactions. A variety of factors might be limiting firms’ ability and willingness to raise prices. In my view, with inflation muted, there isn’t much case for stepping on the brakes. At the same time, I don’t see the current levels of inflation or inflation expectations as a trigger for additional accommodation. The potential to use rate changes to alter firms’ settled routines is small, and the potential cost of overreaching feels real. It’s also hard to make a case for stepping on the gas with unemployment so low and consumer spending so healthy. That said, I am tracking closely the environment for growth. If confidence falters sharply, I would make the case to my peers that we should pay attention to it and do what we can to support continued economic expansion.