Philip N Jefferson: Economic uncertainty and the evolution of monetary policymaking

Speech by Mr Philip N Jefferson, Vice Chair of the Board of Governors of the Federal Reserve System, at the International Research Forum on Monetary Policy, Washington DC, 16 April 2024.

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

Thank you, Matteo. It is my pleasure to welcome you to the 13th International Research Forum on Monetary Policy. The vibrant discussions you will engage in at this conference, and your research more broadly, will help us to understand better the origins and implications of uncertainty. I became a member of the Federal Reserve Board just as it was grappling with the economic after-effects of the pandemic, a once-in-a-century disturbance of worldwide significance. As a result, I know from firsthand experience that understanding the main sources of uncertainty and how best to make monetary policy decisions in the presence of uncertainty are crucial to policymaking.

I will take this opportunity to do a couple of things. First, I will review a few historical examples of how economic thinking on monetary policymaking in the presence of uncertainty has evolved. Second, I will consider lessons learned from these examples that could influence how monetary policymakers think about the policy choices the Federal Open Market Committee (FOMC) faces currently.

The 1960s to the 1980s

In the 1960s, during the heyday of Keynesian macroeconomics, researchers widely believed that monetary policymakers faced a long-run tradeoff between inflation and unemployment, and that the tradeoff could be calibrated to keep unemployment indefinitely low at an acceptable cost in terms of higher inflation. Improvements in econometric modeling abounded, and the harnessing of optimal-control methods developed in the field of engineering held out the prospect that business cycle fluctuations could be stabilized.