Weekly Update
March 30, 2026
Upcoming Events
Monday, March 30
Divisia Release
Powell Speaks at Harvard University Event
Williams Speaks at Staten Island Economic Development Corporation Event
Tuesday, March 31
Job Openings and Labor Turnover Survey Report
Goolsbee Speaks at Chicago Fed Economic Mobility Project Event
Barr Speaks at Federalist Society Event
Bowman Speaks at Consumer Bankers Association Event
Wednesday, April 1
GDPNow Update
Barr Speaks at National Fair Housing Alliance Responsible AI Symposium
Thursday, April 2
GDPNow Update
Friday, April 3
Jobs Report Release
Recent News
On message… Despite Milton Friedman’s famous assertion that “Inflation is always and everywhere a monetary phenomenon,” Federal Reserve officials remain reluctant to accept blame for above-target inflation. At the press conference following this month’s Federal Open Market Committee Meeting, Federal Reserve Chair Jerome Powell blamed “a series of shocks,” including tariffs and now the conflict in the Middle East, for the more recent misses. In the time since, other FOMC members have echoed Powell.
In a talk at the Brookings Institution last week, Fed Governor Michael Barr said the U.S. economy had “thus far remained resilient, despite having experienced a series of shocks over the past year.”
The latest of these developments has been the current conflict in the Middle East, which has affected both oil production and transportation in much of the region, driving up energy prices and affecting other commodities as well. If the conflict were to end soon, it is possible its effects on inflation and economic activity could be limited. But if it continues for some time, the spike in energy prices and other commodities could have broader implications for both prices and economic activity. We have had five years now of inflation at elevated levels, and near-term inflation expectations have risen again, so I am particularly concerned that yet another price shock could increase longer-term inflation expectations.
Barr also described “the impact of tariffs on inflation” as a “key factor” over the last twelve months:
Tariffs have driven up goods prices. Elevated goods inflation has contributed significantly to a stalling in the disinflationary process. While the effective tariff rate had been fluctuating at a high but variable level for around a year now, the recent Supreme Court ruling has led to a reduced rate of around 10 percent—a still-high level. And additional measures could move tariffs higher again. These fluctuations add to uncertainty about the ultimate effects of tariffs on inflation. A reasonable base case is that tariff effects on inflation will wane later this year, but there is some risk that tariff effects will take longer to dissipate.
Vice Chair Philip Jefferson discussed the “ongoing uncertainty over tariff policy and the recent jump in energy prices” at a Dallas Fed event last week. He said “progress on disinflation has stalled over the past year, mainly because of tariffs.” In the near term, Jefferson expects “overall inflation to move higher, reflecting a rise in energy prices stemming from the conflict in the Middle East.”
There is no denying the adverse supply shocks. But they are, at most, only part of the story. The pass through from tariffs to consumer prices has been pretty limited thus far and the recent rise in energy prices is too recent to have an effect on the data published to date.
At least as important as—and I would argue more important than—the “series of shocks” Powell and other FOMC members are calling attention to is the surge in nominal spending that occurred over the back half of 2025.
Nominal spending growth, which had averaged 4.1 percent over the five years just prior to the pandemic, surged to 11.6 percent in 2021. It then gradually declined to 7.6 percent in 2022, 6.0 percent in 2023, and 4.8 percent in 2024. It continued to decline over the first half of 2025, growing at an annualized rate of 4.4 percent. Then, it rebounded in 2025:H2, growing at an annualized rate of 6.2 percent.
On the whole, nominal spending grew 5.3 percent in 2025. That was 50 basis points faster than it had grown in 2024 and 70 basis points faster than the median FOMC member had implicitly projected just prior to the start of the year. For comparison, inflation (as measured by the Personal Consumption Expenditures Price Index) was about 90 basis points above target in 2025. Hence, most of the above target inflation can be explained by excess nominal spending growth.
The surge in nominal spending growth is not attributable to tariffs, the recent conflict in the Middle East, or other supply-side factors. Nominal spending reflects aggregate demand in the economy. And, whereas the Fed cannot effectively counter supply shocks, it can—and should—counter demand shocks. But acknowledging that now would require Fed officials to accept at least some of the blame for the lack of progress on inflation. Unfortunately, there appears to be little appetite for that.
Downsizing… Fed Governor Stephen Miran thinks the central bank should shrink its balance sheet. In a talk at the Economic Club of Miami last week, Miran discussed “potential paths forward toward accomplishing that goal” and “the monetary policy implications of such action.”
Miran offered several reasons for reducing the balance sheet:
We should aim for as small a footprint in markets as possible to minimize government-induced distortions, including funding market disintermediation. A smaller balance sheet also helps lower the chances of mark-to-market losses at the central bank and the volatility of remittances to the Treasury. In addition, a smaller balance sheet better protects the boundaries between monetary and fiscal policy by preserving the duration profile of the public debt as a fiscal policy item, keeping the Fed out of the credit allocation game across sectors, and reducing interest payments on reserve balances, which some in Congress view as a subsidy to the banking system. Finally, a smaller balance sheet preserves dry powder for a scenario in which policymakers must again confront the zero lower bound on interest rates.
Although Miran acknowledged that “growth in currency demand, the post-crisis regime put in place by the Dodd-Frank Act and reforms to the Basel standards, and the resulting changes to market structures and expectations all resulted in greater demand for reserves in the system,” he said the Fed could shrink its balance sheet by “quite a lot.” Indeed, his back of the envelope calculations suggest the Fed could reduce its balance sheet by $1 trillion to $2 trillion without returning to a scarce reserves regime.
Miran noted that balance sheet reductions would have contractionary economic effects, through both liquidity and portfolio balance channels, but said the Fed can offset those effects by lowering its federal funds rate target. He discusses the issues at greater length in a new Finance and Economics Discussion Series paper with Fed staff economists Alyssa Anderson, Alessandro Barbarino, Anthony Diercks.