Monetary policy in a new economic and geopolitical scenario

Raphael Bostic and Jaime Caruana

On 15 November 2018, the Rafael del Pino Foundation, the Global Interdependence Center and BBVA organised the meeting "Monetary policy in a new economic and geopolitical scenario" with the participation of Raphael Bostic and Jaime Caruana.

Dr Raphael W. Bostic took office on 5 June 2017 as the 15th president and chief executive officer of the Federal Reserve Bank of Atlanta. He is responsible for all activities of the Bank, including monetary policy, banking supervision and regulation, and payment services. He also serves on the Federal Reserve's primary monetary policy body, the Federal Open Market Committee (FOMC). From 2012 to 2017, Bostic held the Chair in Governance and the Public Enterprise at the Sol Price School of Public Policy at the University of Southern California (USC). He came to USC in 2001 and served as a professor in the School of Policy, Planning and Development. His research has spanned many fields, including homeownership, housing finance, neighbourhood change and the role of institutions in shaping policy effectiveness. He was director of USC's master's programme in real estate development and was the founding director of Casden Real Estate Economics Forecast. Bostic also served as acting associate director of USC's Lusk Center for Real Estate from 2007 to 2009 and acting director from 2015 to 2016. From 2016 to 2017, he was chair of the centre's Governance, Administration and Policy Process department. From 2009 to 2012, Bostic was the assistant secretary for policy development and research at the U.S. Department of Housing and Urban Development (HUD). In that position, he was a senior advisor to the secretary for policy and research, and assisted the secretary and senior staff in making informed decisions on HUD policies and programmes, as well as budget and legislative proposals. Bostic served on the Federal Reserve Board of Governors from 1995 to 2001, first as an economist and then as a senior economist in the monetary and financial studies section, where his work on the Community Reinvestment Act earned him a special award. He served as special assistant to the assistant secretary for research and policy development at HUD in 1999. He was also a professional lecturer at American University in 1998. Bostic was born in New York City in 1966 and grew up in Delran, New Jersey. He graduated from Harvard University in 1987 with a combined major in economics and psychology. D. in economics from Stanford University in 1995. He previously served on many boards and advisory committees, including the California Community Reinvestment Corporation, Abode Communities, NeighborWorks, the National Community Stabilization Fund, the Urban Land Institute, the Consumer Financial Protection Bureau, the American Real Estate and Urban Economics Association, the National Economics Association, and Freddie Mac. The Federal Reserve Bank of Atlanta serves the Sixth Federal Reserve District, which covers Alabama, Florida and Georgia, and parts of Louisiana, Mississippi and Tennessee. The Bank has branches in Birmingham, Jacksonville, Miami, Nashville and New Orleans.

Jaime Caruana Lacorte is an independent director of BBVA. From 2009 to 2017 he was director general of the Bank for International Settlements and extraordinary professor in the Department of Economics at IESE. Previously, he was director of the Monetary and Capital Markets department and financial advisor to the managing director of the International Monetary Fund (IMF), who was governor of the Bank of Spain from 2000 to 2006. From 2000 to 2006, Jaime Caruana served as Governor of the Banco de España and as such was a member of the Governing Council of the European Central Bank. In addition, from 2003 to 2006 he was Chairman of the Basel Committee on Banking Supervision and since 2003 he has been a member of the Financial Stability Board (FSB). He is also a member of the Group of 30 (G30). Jaime Caruana holds a degree in Telecommunications Engineering from the Polytechnic University of Madrid and worked in the private sector for a decade before joining the Banco de España.


On 15 November 2018, the Rafael del Pino Foundation hosted a dialogue on "Monetary policy in a new economic and geopolitical scenario", which featured Raphael Bostic, President of the Atlanta Federal Reserve. In his speech, Bostic referred to the context that informs monetary policy decisions, for which he began by referring to the recent monetary history of the United States and, more specifically, to 2015, when the Federal Reserve began the process of monetary normalisation through the first interest rate hikes, from the near-zero level at which it had set them to combat the financial crisis. Since then, the Fed has been raising rates in small but steady doses without any negative effects on the labour market. Inflation, in turn, was well below the long-term price target. By June 2017, the unemployment rate had fallen to 4.31GDP3Q, exceeding the best expectations. Inflation, for its part, had behaved as expected. The Federal Reserve therefore decided to take the second step towards monetary normalisation by starting to reduce the Fed's balance sheet, which had quadrupled during the crisis. A process that the Fed decided to carry out gradually so as not to disrupt the stability of financial markets and to avoid abrupt interest rate movements. The strategy can be considered a success, as inflation is around 21Trp3T and unemployment has fallen to 3.71Trp3T, a rate not seen for the last fifty years. The question now is whether and what further adjustments are needed to achieve monetary policy neutrality. The question is important because a very important element of good policy is the appropriate calibration of policy in order to be able to manage upside and downside risks. Indeed, the Fed now has to strike a balance between stopping before full normalisation has been achieved and risk overheating an unstable economic environment, or going too far and short-circuiting a sustainable economic expansion. The risk of stopping too early is related to the level of unemployment, which is at historically low levels and below the level that the Federal Reserve considers sustainable over the medium term, which is a rate of between 4.31GDP3T and 4.61GDP3T. Such low levels of unemployment put enormous pressure on the economy when, as is now the case, they are below the natural rate of unemployment. Such periods of high pressure always end in recession because they overheat the economy. In this context, the decision-making process in the private sector becomes increasingly risky and imbalances emerge, especially in the financial markets. Another consequence of overheating is that inflationary pressures inevitably arise, prompting the central bank to respond aggressively, leading to a weakening of the economic situation. As regards the risks associated with being too aggressive, rather than too timid, the main uncertainty is that it is very difficult to determine whether an economy is overheated. Consider, for example, the determination of the "normal" unemployment rate. When the process of monetary normalisation began in 2015, I considered a normal rate of unemployment to be 5%. Now I think that, in the long run, it is closer to 4%. Estimating the capacity of the economy is also very difficult. Many economists estimate that the trend in the labour force participation rate is negative because of the ageing of the population. However, in recent years it has been flat and has recently increased. In addition, there are other macroeconomic risks. Part of the strength of US GDP growth is due to fiscal stimulus, but these effects will fade in the coming years. To this must be added the risks stemming from the global increase in tariffs and international trade developments. Given all these risks, it is best to proceed with caution and keep an eye on the data. I do not think we are far away from monetary policy neutrality, which is where we want to be. But I am also prepared to support a more aggressive approach if the data offer signs of overheating.

The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio González, are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of the authors.

The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio J. González, are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.