October 31, 2004
What Does Accommodative Mean? One Governor's View
On Friday, Governor (and Vice Chairman of the Board) Roger Ferguson gave his view on what the Federal Open Market Committee means by "the stance of monetary policy remains accommodative."
What is needed is a benchmark summarizing the economic circumstances… One way of providing that benchmark is to consider what level of the real federal funds rate, if allowed to prevail for several years, would place economic activity at its potential and keep inflation low and stable. If the actual real rate is below that benchmark level, policy can be viewed as accommodative, in that if that stance were maintained, ultimately pressures on resources would build. If the actual real rate is kept above that benchmark level, policy would seem to be contractionary.
The Governor does worry, however, that the equilibrium real interest rate concept looks better in theory than in practice.
Our knowledge of the workings of the economy is sufficiently imprecise that we could not attach much confidence to any single calculation that one might make of the equilibrium rate.
Where does that leave us? Some place that's sounding familiar by now.
In my judgment, we should remove the current degree of accommodation at a pace that is importantly determined by incoming data and a changed outlook.