Today, William C. Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, commented on the usefulness of a financial conditions framework approach to evaluating economic outlook and monetary policy at the University of Chicago Booth School of Business Annual U.S. Monetary Policy Forum.
Mr. Dudley opened his remarks by highlighting the advantages of using financial conditions indices for analyzing economic outlook and monetary policy versus reliance solely upon the federal funds rate. He opined that “what is happening to the fed funds rate is not sufficient to predict economic activity” because “the level of the federal funds rate influences other financial market variables such as money market rates, long-term interest rates, credit spreads, stock prices and the value of the dollar, and it is these variables that influence real economic activity.” He also expressed concern about the use of an equilibrium fed funds rate of two percent by analysts and economists.
Mr. Dudley then presented his views on the recently published draft paper entitled “Financial Conditions Indexes: A Fresh Look after the Financial Crisis." While commending the expansiveness of the paper’s analytic approach by including 44 financial variables divided across five categories, at the same time he commented that, as even the paper notes, the indices that have been developed are “ad hoc” and “still very rudimentary.” Mr. Dudley concluded his remarks by encouraging the authors of the paper to continue their work exploring how developments in the financial sector influence the real economy and monetary policy.