Former Federal Reserve Chairman Ben Bernanke explains the ongoing shift in the Fed's economic views in his latest blog for The Brookings Institution.
"Over the past couple of years, [Federal Open Market Committee] participants have often signaled that they expected repeated increases in the federal funds rate as the economic recovery continued," Bernanke writes. "In fact, the policy rate has been increased only once, in December 2015, and market participants now appear to expect few if any additional rate rises in coming quarters."
While most commentary on FOMC decisions focuses on short-run factors, such as the uncertainty created by the recent Brexit vote, Bernanke explains that there's more to it than just that.
"While [short-run] factors do affect the meeting-to-meeting timing of monetary policy decisions, they can't account for extended deviations of policy from its expected path," he writes. "The more fundamental reason for the shift in policy trajectory is the ongoing change in how most FOMC participants view the key parameters of the economy."
To quantify changes in the thinking of FOMC participants, Bernanke looks at the views expressed by individual participants – specifically in the Fed's Summary of Economic Projections. (Each quarter, individual FOMC participants — the Washington-based members of the Fed's Board of Governors and all 12 of the regional Federal Reserve Bank presidents — submit their projections of how they expect certain key economic variables to evolve over the next 2-3 years and in the longer run.)
"Over the past few years, and especially during the past 12 months, FOMC participants have significantly revised down their estimates of potential long-run U.S. economic growth, the long-run or 'natural' rate of unemployment, and the long-run ('terminal') value of the federal funds rate — all of which are key determinants of economic performance," Bernanke writes.
According to Bernanke, the declines in the past year have been particularly striking.
Based on the central tendencies submitted by FOMC participants, between June 2015 and June 2016 the typical participant marked down her estimates of both output and unemployment by 0.25 percentage points, while the median estimate of the fed funds rate dropped by 0.75 percentage points.
Cumulatively, over the past four years, Bernanke finds that estimated output has fallen 0.5 percentage points, estimated unemployment has declined 0.75 percentage points, and estimated fed funds rate has fallen by a substantial 1.25 percentage points.
