Comments on Monetary Policy in a Low Inflation Environment

It's a pleasure to be here today and to have this opportunity to comment on conducting monetary policy in a low inflation environment. I've been at the Fed for more than 32 years and have had the privilege of either advising monetary policymakers or being a policymaker myself throughout my career. It has been quite a ride. For much of this period the Fed was struggling either to prevent inflation from rising further, or to bring it down. As you know, over the last several years we have succeeded in reducing the inflation rate to about 1½ percent as measured by the core personal consumption expenditures (PCE) price index — today's favored inflation index — and in stabilizing the rate at that level. In the parlance of the day we have finally attained "price stability," meaning both low actual inflation and the credible expectation in the minds of financial market participants and the general public that it will persist, which together constitute the monetary policy equivalent of finding the Holy Grail. In my brief remarks I want to do four things. First, I will compactly review several key aspects of the evolution of monetary policy over the last 30 years. To appreciate fully the nature of the challenge that lies ahead, it is essential to understand how price stability was lost in the 1970s and regained in the '80s and '90s. Second, I will try to convey the essence of the current strategy of Fed monetary policy. I'll then close with a brief discussion of the challenges monetary policymakers face in today's low inflation environment, as I see them, and a pitch for explicit inflation targeting as a means of preserving the substantial improvement in the effectiveness of monetary policy during the Volcker-Greenspan years. As usual, these views are my own and don't necessarily reflect those of my Federal Open Market Committee (FOMC) colleagues. Also as usual, my views have been strongly influenced by discussions with, and the writings of, my long-time Richmond Fed colleague Marvin Goodfriend — in particular a preliminary version of a paper he will deliver at a National Bureau of Economic Research conference on inflation targeting later this month. He is not necessarily responsible, however, for anything I say here today.