Opening remarks for Fed Listens

Thank you, Kseniya [Benderskaya], for the introduction. And thank you all for joining us this afternoon in-person in El Paso or on the livestream.

I am happy to be back in this important border community as part of my 360 Listening Tour. These ongoing visits to communities throughout the Dallas Fed’s district help me connect with the people we serve. And each person I meet shares insights that deepen my understanding of the local and national economies.

During a visit to the Borderplex area last year, I toured a maquiladora in Juarez that specializes in medical equipment. At the time, official data had not yet indicated any increase in foreign direct investment in Mexico as a result of nearshoring. But leading up to the visit, I was hearing a very different story from our contacts in the area. Factories were opening, new business opportunities were arising, and there was a lot of commercial interest in the area. En route to the maquiladora, I saw this growth firsthand: active maquiladoras, new construction and price adjustments on existing properties that clearly signaled growing demand. Although the official statistics didn’t yet show this trend, there was no denying what we could see in real time.

That direct observation, inspired by what we’d heard from local contacts, is just one example of how on-the-ground insights improve the Fed’s understanding of the economy and our thinking about policy. I bring those perspectives with me to Washington for the Federal Open Market Committee (FOMC) meetings where we set monetary policy for the United States.

Our goal today, as always, is to hear your perspectives on the economy, but today’s event is special in one way. Besides being part of my ongoing listening tour, this gathering is part of the national Fed Listens initiative and will contribute to the ongoing five-year review of the Federal Reserve’s monetary policy strategy, tools and communications—what we call our monetary policy framework. I’d like to begin with a few thoughts on that framework to frame our discussion. As always, these views are not necessarily those of my FOMC colleagues.

One of the Fed’s five statutory functions is to carry out monetary policy to pursue two goals established by Congress: maximum employment and price stability. Monetary policy influences the economy gradually, over time, and its effects depend in part on how families and businesses expect monetary policy to evolve in the future. For example, if you’re deciding whether to buy a car or house or invest in a business, your decision probably depends not only on how the economy looks today but also on your expectations for the future. How secure will your job be? How much will it pay? How much demand will there be for your company’s products? And those long-term economic outcomes in turn depend partly on future monetary policy.

So, to achieve the best long-run outcomes with monetary policy, the FOMC must act for the long term. We must have a clear strategy and follow it over time. We must communicate that strategy effectively, so the public knows what we’re doing and what to expect. And we must use our tools well, so that we can actually implement the strategy. The monetary policy framework allows us to operate strategically in that way.

The FOMC first formally established its monetary policy framework in a statement issued in 2012. Many elements of the framework have been constant since then, in keeping with our long-run approach to policymaking. For example, the initial framework established our long-run price stability goal of a 2 percent inflation rate as measured by the price index for personal consumption expenditures. That goal remains firmly established today. Communicating it helps anchor long-run inflation expectations at the 2 percent target and reinforces price stability.

The initial framework also established that the complex, dynamic nature of the labor market means we can’t specify a fixed, numeric goal for maximum employment. Rather, we must assess labor market conditions in a more nuanced way. And the initial framework emphasized the importance of the FOMC’s firm commitment to our Congressional dual mandate and of communicating clearly with the public—both to make policy effective and to foster transparency and democratic accountability. All of those points, too, remain firmly established.

However, while the monetary policy framework is a long-run framework, it is not an immutable framework. The structure of the economy changes over time, and the framework needs to adjust periodically to reflect both those economic changes and the FOMC’s ongoing learning about which policy approaches are most effective. For that reason, we review the framework every five years to consider what updates may be needed.

The current version of the framework was written in 2019 and 2020, and it reflects the challenges of that time. Following the Global Financial Crisis, the United States experienced close to a decade of low growth, low interest rates, and below-target inflation that responded only weakly to gains in employment. Drawing on that experience, the framework adopted five years ago emphasized judging the labor market based on shortfalls of employment relative to the maximum level and making up for past low inflation by allowing inflation to temporarily overshoot the target.

We are now in a higher-rate environment, and the postpandemic experience provides ample evidence of the potential for inflation to surge far above target. So while we should remain willing to forcefully use all available tools in scenarios of low rates and low inflation, I believe we should also make the monetary policy framework robust to a wider range of scenarios. Regarding inflation, it seems more appropriate to me to focus on achieving our inflation target going forward, rather than trying to make up for past shortfalls of inflation. In the labor market, I am inclined to pay more attention to increases of employment above the maximum sustainable level, not just shortfalls from that level. And I believe that, to help the public understand how policymakers think about a range of possible environments, the FOMC should consider how our communications can better convey key risks and uncertainties and how monetary policy would respond to them.

This year’s framework review has three main elements: a research conference held last month at the Federal Reserve Board, ongoing deliberations at FOMC meetings and Fed Listens events such as this one. Public dialogue like today’s is particularly important given the Federal Reserve System’s structure.

In remarks last week in Waco, I discussed two unique elements of the Fed’s structure that are crucial to how we serve you. The Fed is not one centralized organization but rather a federated system with deep local roots. And in our monetary policy responsibilities, the Fed operates independently while remaining accountable to the public through elected leaders. Let me say more about each of those characteristics and how they relate to the framework review and today’s meeting.

The Fed consists of a Board of Governors in Washington as well as 12 regional reserve banks, the one I lead in Dallas and 11 others, that serve districts around the United States. As I mentioned at the start, this network of operations gives us insight into communities’ unique economic circumstances. That helps the Fed make the best economic decisions to serve the country as a whole. And because each reserve bank is a separate corporation with its own board of directors representing the public in the district, the people of the region have a direct say in how we do our work and can hold us accountable for ensuring your voices are heard in the national conversation.

Turning to monetary policy, to have a sustainably strong economy, a central bank has to make decisions with the long run in mind. In the short run, a central bank could juice employment by cutting interest rates. People might enjoy that for a little while, but over time, excessive rate cuts would trigger a spiral of inflation. And those rising prices would wipe out whatever temporary benefits people experienced from a hot labor market.

Congress designed the Federal Reserve System to promote that long-term focus while maintaining ultimate accountability to the public. Members of the Board of Governors are appointed by the president and confirmed by the Senate to serve 14-year terms. Reserve bank presidents, like me, are appointed to five-year terms by our local boards of directors, with approval by the Board of Governors. All of us serve together on the FOMC, and the long terms for our roles allow us to think about which policies will best serve the country over time.

But while the Fed’s leaders aren’t up for election, we remain accountable to the public for achieving our assigned monetary policy goals. That accountability comes through the Fed chair’s regular, semiannual testimony to Congress, our extensive public dialogue and communications, and ultimately through the regular turnover of governors and reserve bank presidents as terms are completed and new leaders are appointed.

Today’s conversation deepens the Fed’s local roots and contributes to our independence coupled with accountability. It is your opportunity to tell us how our monetary policy decisions affect you and your communities, what economic concerns you think we should focus on, how you judge the performance of our strategy over the past five years, and what strategic approach you think we should take in the future. Your experiences and insights will complement the data and models we analyze and help us form a more complete picture of how the economy is working for the people we serve.

Our participants today represent a wide range of critical perspectives: nonprofit service providers, education, workforce development, economic development, local philanthropy and business. Many thanks to all of you who made the time to be here today and share your views.