Upcoming Events
Tuesday, February 27
GDPNow Update
Money Stock Measure Release
Barr Speaks at Conference on Counterparty Credit Risk Management
Wednesday, February 28
GDP Release
Williams Speaks at LIA Regional Economic Briefing
Thursday, February 29
PCEPI Release
GDPNow Update
Williams Speaks at Citizens Budget Commission
Bostic Speaks at Banking Outlook Conference
Mester Speaks at Bank Regulation Research Conference
Goolsbee Speaks at Princeton University
Friday, March 1
GDPNow Update
Waller Speaks at U.S. Monetary Policy Forum
Logan Speaks at U.S. Monetary Policy Forum
Daly Speaks at U.S. Monetary Policy Forum
Schmid Speaks at U.S. Monetary Policy Forum
Kugler Speaks at Stanford Institute for Economic Policy Research Economic Summit
Recent News
By the minutes… The Federal Open Market Committee (FOMC) released the minutes from its January meeting last week. Considering that the Personal Consumption Expenditures Price Index (PCEPI) has grown at an annualized rate of 2.0 percent over the last seven months and core PCEPI, which excludes volatile food and energy prices, has grown at an annualized rate of 1.9 percent, one might expect FOMC members to take the W. Instead, they worry that “some of the recent improvement in inflation reflected idiosyncratic movements in a few series," which might be followed by a resurgence in inflation. Consequently, FOMC members “did not expect it would be appropriate to reduce the target range for the federal funds rate until they had gained greater confidence that inflation was moving sustainably toward 2 percent.”
FOMC members are now trying to balance the risk of doing too little with the risk of doing too much.
Most participants noted the risks of moving too quickly to ease the stance of policy and emphasized the importance of carefully assessing incoming data in judging whether inflation is moving down sustainably to 2 percent. A couple of participants, however, pointed to downside risks to the economy associated with maintaining an overly restrictive stance for too long.
The staff’s forecast suggests the economy will underperform this year and next, but less so than was previously expected.
The lagged effects of earlier monetary policy actions, through their continued contribution to tight financial and credit conditions, were still expected to push output growth in 2024 and 2025 below the staff's estimate of potential growth; in 2026, output was expected to rise in line with potential. The projected path for the unemployment rate was revised down slightly, reflecting the upward revision to the level of output.
The staff also said uncertainty around its baseline projection has diminished, but remains elevated.
Risks around the inflation forecast were seen as tilted slightly to the upside; although inflation had come in close to expectations throughout most of 2023, the staff placed some weight on the possibility that further progress in reducing inflation could take longer than expected. The risks around the forecast for real activity were viewed as skewed to the downside, as any substantial setback in reducing inflation might lead to a tightening of financial conditions that would slow the pace of real activity by more than the staff anticipated in their baseline forecast. In addition, the possibility of a larger-than-expected erosion of households' financial positions was seen as a downside risk to the projection for real activity.
The FOMC is unlikely to lower its federal funds rate target range when it meets in March. The CME Group currently puts the odds at just 2.5 percent. There is a 20.1 percent chance that the federal funds rate target will be lower in May and a 68.0 percent chance it will be lower in June.
Lessons from history… In a talk at the Peterson Institute for International Economics last week, Vice Chair Philip Jefferson reviewed the Fed’s historical efforts to ease policy following tightening cycles since 1989. According to Jefferson, “two facts stand out”:
Most easing cycles begin because monetary policymakers are concerned about slowing economic growth.
Unexpected events often complicate monetary policy decisions.
Jefferson identifies just one exception to (1): the easing cycle that began in July 1995. In this episode, the “easing cycle started predominantly because of reduced inflation concerns.” He notes that this episode is also “associated with what Alan Blinder (2023) has labeled a ‘perfect soft landing’ example.”
Regarding (2), Jefferson observes “that four out of the six easing cycles had multiple ‘easing phases,’ with later phases triggered by events like the 1991 Gulf War, the 9/11 terrorist attack, the Global Financial Crisis, and the pandemic.”
These events required policymakers to take a different course of policy easing from the course they may have anticipated earlier in the cycle. Specifically, because these events contributed to the contraction of economic activity, policymakers may have accelerated policy easing. The main messages that I see emerging from this review of the record are that policymakers need to remain vigilant and nimble, in case of adverse shocks hitting the economy, and that policymakers need some good luck.
The wait-and-see approach… Recent data has reinforced Governor Christopher Waller’s “view that we need to verify that the progress on inflation we saw in the last half of 2023 will continue.” He told attendees at the University of St. Thomas that “there is no rush to begin cutting interest rates to normalize monetary policy.”
Waller notes that the recent uptick in Consumer Price Index inflation “was spread widely among goods and services.”
This one month of data may have been driven by some odd seasonal factors or outsized increases in housing costs, or it may be a signal that inflation is stickier than we thought and will be harder to bring back down to our target. We just don't know yet. While I believe inflation is likely on track to reach 2 percent in a sustainable manner, I am going to need to see more data to sort out whether January's CPI inflation was more noise than signal. This means waiting longer before I have enough confidence that beginning to cut rates will keep us on a path to 2 percent inflation.
Fortunately, the strength of output and employment growth means that there is no great urgency in easing policy, which I still expect we will do this year.