Michelle W Bowman: Risks and uncertainty in monetary policy - current and past considerations

Speech by Ms Michelle W Bowman, Member of the Board of Governors of the Federal Reserve System, at the "Frameworks for Monetary Policy, Regulation, and Bank Capital" Spring 2024 Meeting of the Shadow Open Market Committee, hosted by the Manhattan Institute, New York City, 5 April 2024.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Central bank speech  | 
10 April 2024

Thank you for the invitation to speak to the Shadow Open Market Committee (SOMC). The SOMC has a distinguished reputation for fostering substantive analysis and debate regarding independent, transparent, and systematic approaches to central bank policymaking. It's a pleasure to join you today and to discuss some of the current issues facing central banks and monetary policymakers.

In my remarks today, I will review some of the notable developments in the U.S. economy and financial system-as well as review key monetary policy actions and communications-since I joined the Board of Governors of the Federal Reserve System and became a permanent voting member of the Federal Open Market Committee (FOMC) in late November 2018. As I look back over these five-plus years, I will consider how a range of uncertainties and risks regarding the macroeconomy and its measurement have affected monetary policy decisions and communications. I will also highlight some considerations regarding financial stability risks and monetary policy. I will conclude with my own views on the near-term economic outlook, some of the prominent risks and uncertainties surrounding my outlook, and my views on the implications for monetary policy.

Setting Monetary Policy amid a Wide Range of Uncertainties and Risks

An omni-present challenge monetary policymakers face is how to account for uncertainties surrounding the current state of the economy and the economic outlook when setting monetary policy. Macroeconomic models that can help guide the setting of monetary policy often invoke unobservable concepts such as the natural rate of unemployment, potential output, or the neutral real interest rate. These unobservable concepts can be estimated but only with a considerable degree of uncertainty, and the estimates may vary over time-for example, because of structural changes in the economy. Macroeconomic models are also subject to uncertainty, since they must make simplifying assumptions regarding the complex set of relationships and interactions among households, businesses, governments, and the financial system that also evolve and change. Moreover, the data that are used to estimate model parameters and to formulate the economic outlook are inherently uncertain and are often revised as the statistical agencies refine their estimates or gather more information.