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Fed Gov. Powell: Monetary Policy Remains Data-Dependent

Fed Gov PowellNow that the financial crisis has receded and the economy is gradually recovering, the evidence of the effectiveness of the Federal Reserve's large-scale asset purchases (LSAPs) is mixed but positive overall, Federal Reserve Governor Jerome Powell said in a recent speech.

Speaking June 27 at the Bipartisan Policy Center in Washington, D.C., Powell noted that the first round of purchases of longer-term securities that started in late 2008 played an important role in ending the crisis and preventing more severe economic damage. The second round of purchases, which began in late 2010, also appears to have helped in countering disinflationary pressures, he added.

Program provides "meaningful support"
Today, the Fed's primary economic model estimates the unemployment rate is about 0.2 percent less than it would otherwise be after three years and $500 billion in purchases of longer-term securities. One can find reasons to argue that this estimate may be too low or too high, Powell said. In his view, LSAPs are providing "meaningful support for economic activity."

"Although the channels may not be working perfectly, it is unlikely that they are not working at all," Powell said during his speech. "Beyond these model-predicted effects, it also seems likely that the economy continues to benefit from the knowledge that the Federal Reserve is committed to supporting growth as long as necessary."

Real progress in the labor market
While significant challenges remain, Powell cited progress in the labor market. At its September 2012 meeting, the Fed's policymaking Federal Open Market Committee (FOMC) adopted the stance that it would continue the latest round of LSAPs until "substantial improvement" in the labor market outlook took place. In September 2012, the unemployment rate was 8.1 percent. Nine months later, the rate is 7.6 percent, "a larger decline than most FOMC participants expected in September," Powell remarked.

When the FOMC met in September 2012, the economy was reported to have added an average 97,000 nonfarm jobs a month during the previous six months. Now, the average for the past six months of payroll jobs growth is 194,000. Other labor market vital signs also are showing moderate progress, including aggregate hours worked, initial unemployment insurance claims, and the length of unemployment, Powell added.

The FOMC's first reduction in asset purchases—whenever it comes—will signal the committee's confidence that the economy is headed for a full recovery, Powell stated. "In all cases, the path of policy will remain fully data-dependent," he said. "If economic growth, unemployment, or inflation do not meet the Committee's expectations, or if financial conditions evolve in a way that is inconsistent with continued recovery, the Committee will respond."

July 11, 2013


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