introduction
Good evening everyone. It is a pleasure to be with you today. First, I want to thank you for your commitment to the economic development of communities throughout the New York region.
My remarks today will focus on the economic outlook in the United States and how the Federal Reserve's monetary policy actions are helping to restore price stability. I will also share some observations on economic developments closer to the New York metropolitan area. Before I continue, I must issue the usual Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee (FOMC) or others in the Federal Reserve System.
The mandate of the Federal Reserve
At the Federal Reserve, our work and actions are guided by our dual mission: to achieve maximum employment and price stability.
As far as employment is concerned, i.e. the first half of the mandate, things are looking very good. The economy created almost 2.9 million wage jobs in 2023.1 The employment ratio of “prime-age” workers aged 25 to 54 has returned to the level of the months before the pandemic. And the national unemployment rate has been at or below 4 percent for two years in a row, the longest such stretch in more than five decades. The current unemployment rate of 3.7 percent is in line with my 3-3/4 percent estimate for the unemployment rate that is likely to continue over the longer term.
As far as price stability is concerned, the situation has improved significantly since the sharp rise in inflation following the outbreak of the pandemic and the Russian invasion of Ukraine. Inflation, as measured by the personal consumption expenditures (PCE) price index, rose to a 40-year high of about 7 percent in June 2022. In the last year and a half, the inflation rate has fallen again to just over 2-2 percent. 1/2 percent. This decline is clearly a positive development, but it is important to emphasize that we still have a long way to go to bring inflation back to the FOMC's longer-term target of 2 percent. Price stability is the foundation of our economic prosperity and is crucial to ensuring maximum employment in the long term.
The job market: USA and New York City
I will now delve a little deeper into the economic situation and outlook, starting with the employment side of our mandate. Following the recovery from the pandemic, we saw a red-hot job market emerge across the country. You know the story: demand far exceeded supply, and this imbalance contributed to rapid wage growth and high inflation.
Although the labor market has remained strong over the past year, we have seen a steady return to better balance. Employment growth ended the year strong, but has slowed significantly compared to unsustainably high rates in the first half of last year. Termination and hiring rates are back near pre-pandemic levels, as are perceptions of job availability and ability to fill positions. The number of job vacancies – which reached an all-time high in 2022 – has also trended downward, but is still high compared to pre-pandemic levels.
We also saw a realignment in New York City, where employment recovery has taken longer than the nation as a whole. Now New York City has essentially regained the jobs lost during the pandemic. Nevertheless, the recovery was uneven. Although employment has rebounded in higher-wage sectors such as finance and business services, sectors that tend to provide jobs for low-wage workers and rely on foot traffic from office workers continue to lag, slowing the city's recovery.
There were also significant improvements on the supply side of the labor market. Labor force participation has trended upward and immigration rates have returned to pre-pandemic levels. However, there are limits to how much supply can increase and further moderation in demand is likely required to restore balance to the labor market.
Three levels of inflation
I will now return to our price stability mandate. If you've read the speeches I've given over the last year or so, you know that I've used a layering-onion metaphor to explain inflation – why it rose so high in 2021 and why it's now easing. 2 In this metaphor I describe three layers, so it has become my “rule of three”, so to speak. Today I'll explain how each of the three layers represents a different sector of the economy.
The first and outermost layer of the inflation onion represents globally traded commodities. When the pandemic hit, demand for commodities surged, contributing to a rise in inflation, and then rose again when Russia invaded Ukraine.
With global demand now better aligned with supply, commodity prices have fallen significantly from their highs. Food price inflation has fallen below 2 percent and energy prices have fallen over the past year, lowering rather than increasing the overall inflation rate.
The second layer of the onion – core goods, i.e. non-food and energy goods – also benefits from the realignment of supply and demand at home and abroad. The inflation rate in this layer of the onion has fallen to almost zero, reflecting slowing demand and the resolution of supply chain bottlenecks that have contributed to rapid price increases. The New York Fed's Global Supply Chain Pressure Index, which measures the extent of supply chain disruptions, shows that overall supply chain pressure has returned to pre-pandemic levels.3
We've now peeled back the first two layers of the onion where the biggest and fastest improvements were seen. The first clear progress can also be seen in the third, innermost layer of the onion. Inflation in the core services sector has declined after peaking early last year. One contributing factor is slowing housing inflation as rent growth for newly signed leases returns to pre-pandemic levels. And the inflation rate for core services excluding housing has also slowed significantly.
Future indicators
Given this summary of the inflation onion, what can we expect for inflation in the future?
A key driver of inflation is inflation expectations, and recent indicators have been quite encouraging. Longer-term inflation expectations remain well anchored at levels consistent with the FOMC's 2 percent target. Medium-term inflation expectations are fully back to pre-pandemic levels. And one-year inflation expectations, which rose as inflation rose, have fallen dramatically to the range seen in the seven pre-pandemic years for which we have survey data.4
A second useful indicator of future inflation is the New York Fed's Multivariate Core Trend (MCT) inflation. After reaching nearly 5 1/2 percent in June 2022, the most recent MCT reading is 2.3 percent.5 Other indicators of underlying inflation are also showing significant declines toward pre-pandemic levels.
The third indicator I'll mention – there's my rule of three again – is wage growth. Economists at the New York Fed have developed a measure of trend wage inflation, which has fallen to about 4 1/2 percent from its peak of nearly 7 percent in December 2021.6 This is another indicator that the labor market is returning to better equilibrium comes .
When we put all of these pieces together, the data suggests we are clearly moving in the right direction. However, we are still a long way from our goal of price stability.
monetary policy
So what does this mean for monetary policy?
The FOMC's policy actions over the past two years have resulted in a restrictive policy stance that helps achieve balance between demand and supply and restore price stability. In December, the FOMC left the target range for the federal funds rate unchanged at 5-1/4 to 5-1/2 percent. In determining the extent of additional monetary tightening that might be appropriate to return inflation to 2 percent over time, the Committee will consider cumulative monetary tightening, the lags with which monetary policy affects economic activity and inflation , as well as the economic and economic situation take into account financial developments.7
So here is my prediction for 2024 and beyond. Taking into account the impact of restrictive monetary policy, I expect GDP growth to slow to around 1 1/4 percent this year and the unemployment rate to rise to around 4 percent. I expect PCE inflation to slow further this year to around 2 1/4 percent before reaching our longer-term target of 2 percent next year.
Nevertheless, the future remains uncertain. The risks are two-sided: the possibility of a persistent imbalance between supply and demand or persistent inflation is offset by the possibility of a weaker than expected economy and a weaker labor market.
My base case is that the current tight monetary policy stance will continue to rebalance and bring inflation back to our longer-term target of 2 percent. I expect that we will need to maintain a restrictive policy stance for some time to fully achieve our objectives and that it will only be appropriate to reduce the level of policy restraint if we are confident that inflation will improve sustainably moving towards a 2 percent basis. The outlook remains highly uncertain and I will continue to carefully monitor and assess the data to assess whether the policy stance is best suited to achieving our objectives. Our policy decisions are made on a meeting-by-meeting basis and follow another rule of three: by looking at the totality of incoming data, the evolving outlook and balancing the risks.
I would like to briefly address the current status of the Fed's balance sheet. At our last meeting in December, the FOMC said it will continue to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities as described in our framework announced in 2022.8 The strategy and implementation of reducing our securities holdings is working exactly as planned. To date, we have reduced our securities holdings by approximately $1.3 trillion without any indication of a negative impact on market function.9
In its plans, the FOMC stated that to ensure a smooth transition, it intended to slow the decline in balance sheet size and stop it when reserve balances were slightly above levels that it considered consistent with sufficient reserves.10 So far We seem not having reached this point yet. The decline in securities holdings was almost entirely offset by a decline in the overnight repurchase agreement facility (ON RRP). As a result, aggregate reserve balances have changed little from their mid-2022 levels, when balance sheet deleveraging began. Looking ahead to this year, we will closely monitor money market conditions and demand for reserves as the balance sheet continues to shrink and ON RRP usage continues to decline.
The FOMC Commitment
I'll close with a final set of three. First, the strong measures we have taken over the last two years are working as intended. Second, we have made significant progress in restoring economic balance and reducing inflation. And third, our work is not yet done. I am committed to achieving our longer-term inflation target of 2 percent and laying a solid foundation for our economic future.