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Economic SYNOPSES 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 conditions. 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” 1 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 (www.bea.gov). 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 Percent 2.00 was raised from 2 percent to 2.3 percent, while the PCE Before price inflation rate over the revision period was boosted After 1.50 from 2 percent to 2.2 percent. 1.00 Since the July 2004 Monetary Policy Report to the Congress, FOMC policymakers have chosen to emphasize 0.50 the PCE inflation rate that excludes food and energy 0.00 prices (core PCE). Although the core PCE price index was revised upward by only about 0.25 percentage points –0.50 to about 1.75 percent over the three-year period, what –1.00 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- S Views expressed do not necessarily reflect official positions of the Federal Reserve System. research.stlouisfed.org