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short essays and reports on the economic issues of the day
2005 ■ Number 23

Has Monetary Policy Been More Accomodative
Than Previously Believed?
Kevin L. Kliesen
ince their January 30, 2002, meeting, the Federal Open
ized as accommodative and economic growth was generally
Market Committee (FOMC) has routinely characterized
robust. From 2003:Q2 to 2005:Q1, the annualized growth rate
its monetary policy stance as “accommodative.” A comof the core PCE price index was revised up 0.5 percentage
monplace interpretation of such a policy is one in which the
points to 2 percent.
FOMC’s intended federal funds rate is kept at a level that, over
One implication of these data revisions is that monetary
time, is expected to support faster growth of aggregate demand
policy now appears to have been more accommodative than
(estimates of real GDP) relative to aggregate supply (estimates
what the FOMC believed at the time. As seen in the figure, the
of potential GDP). If sustained for too long, an accommodaex-post inflation-adjusted federal funds target rate (nominal
tive policy can become destabilizing, creating inflationary
funds rate less the 12-month change in the core PCE) became
even more negative in 2004, whereas in real time the target rate
One of the challenges of this sort of policy is that the data
was observed to have risen to slightly above zero.1 In fact,
policymakers base their decisions on are subject to revision.
current estimates show that a negative real federal funds rate
For example, the national income and product accounts (NIPA)
persisted until the December 2004 meeting, probably a more
data are revised annually. These revisions include both quanstimulative stance than the FOMC intended. While the policy
tity measures (real GDP and components and incomes and
implications of this particular data revision may not be large,
profits, etc.) and associated price indexes (including the “core”
it nevertheless reinforces the difficulties that FOMC policypersonal consumption expenditures [PCE] price index, which
makers confront when implementing policy in real-time. ■
the FOMC tends to focus on). Typically these “benchmark”
The real-time estimates of the core PCE inflation rate are reported in the monthly
revisions cover three years and sometimes incorporate changes
personal income and expenditure reports archived on the BEA’s website
in methodology; however, once every five years or so, the
( The estimates are the 12-month inflation rates that policymakers
Bureau of Economic Analysis (BEA) undertakes a more comconfronted at that particular meeting.
prehensive revision, which can alter the economic picture
going back much further. The latest benchmark revision
was released by the BEA on July 29, 2005.
Real Federal Funds Target Rate: Before and After
The most interesting aspect of this year’s revisions
the July 2005 NIPA Revisions
was the upward revision to the major price indexes.
Growth of the GDP price index over the three-year period
was raised from 2 percent to 2.3 percent, while the PCE
price inflation rate over the revision period was boosted
from 2 percent to 2.2 percent.
Since the July 2004 Monetary Policy Report to the
Congress, FOMC policymakers have chosen to emphasize
the PCE inflation rate that excludes food and energy
prices (core PCE). Although the core PCE price index
was revised upward by only about 0.25 percentage points
to about 1.75 percent over the three-year period, what
is perhaps worrisome is that the largest revisions to the
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May
core PCE inflation rate have occurred since mid-2003.
03 03 03 03 03 03 04 04 04 04 04 04 05 05 05
This is the period when monetary policy was character-


Views expressed do not necessarily reflect official positions of the Federal Reserve System.