Loretta Mester, Speech: An Update on the Economic Outlook and Monetary Policy
“I am in the process of preparing my submission to the Summary of Economic Projections of FOMC participants, which will be released after our next FOMC meeting in two weeks. At this point, I have not incorporated a recession into my baseline outlook for the U.S., but instead expect a fairly sharp slowing in activity, especially when compared to the robust growth the U.S. experienced in 2021. While there is considerable uncertainty, I currently expect that the U.S. economy will return to positive growth in the second half of the year, but for this year as a whole and for next year, I expect growth to run well below 2 percent, which is my estimate of trend growth.”
“With the economy growing below trend, I expect labor market conditions to cool, with the unemployment rate rising somewhat above 4 percent by the end of next year. Some cooling off in the labor market will put it on more sustainable footing compared to the unsustainably tight conditions that exist today. The employment report for August, released last Friday, suggests that we are beginning to see some moderation but that labor market conditions remain strong.”
“In my view, it will take a while for inflation to return to the Fed’s 2 percent goal. But I do expect inflation to move down into a range of 5 to 6 percent for this year and then to make more progress toward our goal over the next two years, because I expect the Fed to take further action to make it so.”
“Monetary policy acts with a lag on the economy. It is unlikely that we have seen the full effect on households and businesses of the rate increases we have implemented so far. Moreover, because of the lagged effects of monetary policy, it would not be appropriate to continue moving rates up until inflation is back down to 2 percent. That said, given the current level of inflation and the economic outlook, I believe that further increases in our policy rate are needed.”
“My current view is that it will be necessary to move the nominal fed funds rate up to somewhat above 4 percent by early next year and hold it there; I do not anticipate the Fed cutting the fed funds rate target next year.”
“In formulating my monetary policy views, I will be guarding against declaring victory over the inflation beast too soon. Doing so would put us back in the stop-and-go monetary policy world of the 1970s, which was very costly to households and businesses.5 Before I conclude that inflation has peaked, I will need to see several months of declines in the month-over-month readings.”
“The return to price stability will take some time and a lot of fortitude. There will be bumps along the road. Financial markets could well remain volatile as financial conditions tighten further; growth could slow more than expected and return to negative territory; and the unemployment rate could move above estimates of its longer-run level. This will be painful in the near term but so is high inflation. High inflation imposes costs on households and businesses in both the short and long run. It eats into savings and makes it hard to plan for the future. Perhaps Paul Volcker said it best as he fought inflation in the 1980s: “…failure to carry through now in the fight on inflation will only make any subsequent effort more difficult, at much greater risk to the economy.”