FEDERAL RESERVE BANK OF NEW YORK

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FEDERAL RESERVE BANK OF NEW YORK
STEVEN MALIN ASSISTANT VICE PRESIDENT PUBLIC
INFORMATION DEPARTMENT
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CURRENT CHALLENGES FACING MONETARY POLICY MAKERS
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Monetary Policy Mission

• To help foster conditions in the economic and
  financial systems conducive to maximum
  sustainable real economic growth with stable
  prices and stable financial markets.

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Inflation Risks

• Still a focus of policy makers and the Street
• Focus on core or headline inflation?
• Which inflation measure?
• Costs Energy, labor, housing and owners
  equivalent rent
• Import price inflation ahead?
• Pricing power, profits and Wal-Mart effects
• Targeting ahead?

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Housing

• Housing price declines How big? How long?
• Rising inventory of houses for sale and a
  residential construction slowdown
• Impacts on other sectors
• Slowing mortgage equity withdrawals Rising
  savings rate and PCE slowdown ahead?
• Non-residential construction still positive
• Overall demonstrated sensitivity to interest rates

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Potential Output

• Summation of growth in productivity and labor
  input
• Productivity growth trend improvement, but
  cyclical slowdown
• Labor force input maxing out?
• Lower potential, plus tight labor markets and
  rising compensation, pose potential inflation
  risks?

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Fiscal Fantasia

• From surplus to deficit, to bigger deficit,...
• structural and cyclical dimensions
• Uncertain revenue streams (e.g., capital gains,
  bonuses, profits)
• political promises
• Weigh out there long-term medical, retirement,
  foreign affairs/military commitments
• How much stimulus from Uncle Sam?
• Financial market impacts -- crowding out or
  crowding in?

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Interest Rate Structure

• Higher short-term rates From accommodation to
  neutrality to restraint
• Long-term rate stickiness
• - reduced risk premiums, especially for
  inflation
• - heavy demand for long-term securities
  (from abroad, GSEs, pension plans)
• Relative rate disparities narrowing across
  countries
• Yield curve inversion Signal of recession ahead?

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Smaller World, Bigger Issues

• External imbalances tough challenges and
  solutions
• Growing U.S. reliance on foreign markets for
  exports
• Dollar weakness vs. currencies of major trading
  partners
• Rising potential for import price inflation?
• Uncertain inflows to capital account

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Riskier Risks

• Overlaying of risks
• Systemic risks mounting
• Economic and financial restructuring
• D tales Debt, deficits, derivatives, dollar,
  demographics, deflation, domicile prices
• Hedge funds
• Tail risks Meteorological, tectonic, terrorist,
  bio virus, computer virus, herd flight of capital