What was “Monetary Policy at a Crossroads” About?

On June 18, 2022, the Federal Reserve Bank of Dallas hosted a policy panel talking about monetary policy for both the Federal Reserve and the European Central Bank.

Key Points

Governor Christopher J. Waller

• That the Fed cut rate to 0% has only happened 2 times in histrory and there is good reason to think such a response may not be extraordinary anymore. Structural changes in the economy have tended to lower interest rates and limit the room that the Federal Reserve will have to cut rates during a slowdown.
• Financial markets stabilized relatively quickly. Over the course of 2020, the Fed's liquidity and credit facilities saw reduced demand and most of the emergency programs were decommissioned around year end.
• In September and December of 2020, the FOMC provided criteria or conditions in the meeting statement that would need to be met before the FOMC would consider raising interest rates and begin to reduce asset purchases.
• In November and December 2020, the unemployment rate was 6.7 percent.
• the Committee did not expect the economy to recover quickly.
• In 2019, unemployment was very low and inflation was near 2 percent, but the policy rate was well above zero and close to its neutral value. It should not have been a surprise that the policy rate would rise fast in 2022.
• 2% for inflation is not a ceiling but a target.
• Market can price in Fed's forward guidance immidiately.
• There are 2 jobs for every unemployeed worker. The labor market is tight. The fear of recession is overblown,

Olli Rehn, Bank of Finland Governor and ECB Governing Council

• Europe's economy revoered from the COVID cries faster than expected.
• Energy inflation is the main driver for eurozone inflation.
• Europe's umemployment is at 40 year low of 6.8%.
• ECB is targeting at 2% inflation rate in the medium term.

Donald Kohn, Robert V. Roosa Chair in International Economics; Senior Fellow - Economic Studies, Brookings Institution

• Prices rose becasue of supply did not keep up with srtong demand.
• Stresstests on Fed's policys against unusual outcomes could be helpful.
• On the supply side, we could increase ligal immigration and lower tarrifs.

Views

• The economy recovered faster than expected. The unemployment rate improved faster than expected. Both have mad Fed hike rate faster.
• The demand for labor is high, so steep rate hikes may not induce too much unemployment or recession.
• Energy prices play a big role in inflation. If enertgy prices stable, inflation could be, too.
• Europe's unployment is at 6.8% and their raising rates? Does this mean it is more likely that Europe would go into recession?
• It is a good thing that Fed gives their forwad guidance and the market can price it in quickly. Because this mean the current stock and bonds' prices are alreafy relfected to the target Fed funds rates.
• The market can price in Fed's forward guidance, and the recent maket drop, I thnkg ,was spooked by the dramatic increase of forward guiadnce. Therefore, although forward guidance helps investors prepare for future market conditions, the forward guidace can change.
• The stock market can bottom if inflation is gradually controlled while the labor market did not get hurt too much. Waiting for FOMC meeting is too late to price in maket. For indivisual investors, even the inflation and labor market data is too late. The market would just pirce them in immediatiely. By the way, we would see some rebounds if the next CPI data is not so bad or otherwise could happen. 
• Jul. 13, 2022 is the date for releasing the next CPI data.
• Let's see if old prices can stablize. If it does, will inflation do, too?

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Surece: Panel Discussion: Monetary Policy at a Crossroads. Board of Governors of the Federal Reserve System. https://www.dallasfed.org/research/events/2022/22panel. 2022/6/18