Panel, Conference Presentation
Monetary Policy: Forward Guidance on the World's Central Banks
Milken InstituteDave, Brian Sack, Janet Yellen, Mike, Athanasios, Cliff Noreen, Jeremy Stein, Dan Tarullo, Mario Draghi
- Central bank communication is projected to emphasize transparency to ensure effective policy transmission, with plans to eventually refine or replace the dot plot via labeling or individual forecasts within the next two to three years to better convey future decisions.
- The Federal Reserve is expected to adopt a patient approach to the initial lifting of the federal funds rate, followed by a tightening cycle that some analysts anticipate could be faster than current "dots" suggest, potentially reaching at least 2.5% by the end of 2016 or a terminal rate below 2% depending on the viewpoint.
- Economic models face the risk of operating under incorrect assumptions regarding a negative equilibrium real interest rate, which could cause policymakers to fall "behind the curve" within the next two or three years if inflation emerges.
- Corporate profitability is expected to improve due to activist pressure, yet continued aggressive credit issuance carries the risk of a bubble and defaults similar to 2006-2007 if issuance overwhelms demand, with credit spreads projected to correct by 25 to 100 basis points this year.
- Global monetary policy divergence is anticipated to increase interest rate differentials as the Federal Reserve, Bank of England, and ECB move apart from the Bank of Japan, with the ECB potentially facing political and legal constraints that delay its quantitative easing efforts despite a need for accommodative policy.
- The normalization of monetary policy will require unwinding the Federal Reserve's expanded balance sheet, which was described as excessive due to QE3, and potentially moving away from the dot chart once the zero bound is left.
- Divergent forecasts exist for the 2016 outlook, with one projection expecting upside surprise in growth and 1.5% inflation alongside a 5.25% unemployment rate, while another projects a higher funds rate and inflation drifting toward 2%, highlighting a wide range of expectations for the terminal policy rate.