Charles Evans, Speech: 2022 Community Bankers Symposium
GDP & Unemployment: “These broad contours are demonstrated in the FOMC’s latest summary of economic projections. The SEP dot plot shows that most FOMC participants are looking at something like another 100 to 125 basis points of rate increases this calendar year, with the median projection for the federal funds rate then rising a bit further to 4.6% at the end of next year. This monetary restraint is clearly showing through in the projection for GDP growth, which the median participant sees running somewhat below its long run rate over the next year and a half or so, before moving back up to trend in the projection period. The unemployment rate is projected to rise to 4.4% by late next year, it’s currently three and a half percent, and then remain near that level in 2024 and 2025. While this does represent a noticeably softer labor market when compared with today’s, these certainly are not recession like numbers.”
Inflation: “As for inflation, with supply side improvements, restricted monetary policy and below trend growth, inflation is expected to moderate significantly. According to the median participant, total PCE inflation is expected to fall to 2.8% in 2023, and eventually return to our 2% target by the end of 2025. Now, that’s the total PCE that’s got food and energy included in it, and energy is expected to come down and food is so high. We’re hoping that will come down to core, when you take those out, is projected to be 3.1% at the end of next year, and that’s probably a bit optimistic still as well, unfortunately. I should note that my personal forecast is broadly in line with these median numbers that I’ve been mentioning, this is pretty optimistic.”
Rate Forecast: “That’s a challenge for monetary policy. There are lags in inflation and how it responds to monetary policy. Even though we’ve front loaded our monetary policy response and things are very restrictive at the moment, it’s going to take time still to work on these more stubborn high price increases. So, that’s going to complicate our path and ultimate path to a peak federal funds rate. I see the nominal funds rate rising to a bit above four and a half percent early in 2023 and then remaining at this level for some time while the FOMC assesses how our policy adjustments are affecting the economy.”
Balance Sheet: I personally think that four and a half to four and three quarters is restrictive all by itself. As I mentioned, we’re expecting inflation to be coming down next year, and so that’s how you get to about a one and a half percent real rate. Then because we’re reducing our balance sheet, what’s referred to as quantitative tightening is going to probably be worth another 35 to 50 basis points of restrictiveness.