Esther George, Speech: Restoring Price Stability: Monetary Policy Considerations for 2023

Inflation Expectations

“Through its aggressive action over the past year, the Federal Reserve has demonstrated its commitment to restoring price stability. This may explain why measures of longer-run inflation expectations have remained relatively stable even as realized inflation has proven to be stubbornly high.”

Policy Path and Economic Uncertainty

“As policymakers judge the appropriate path of policy over the coming year, a number of economic uncertainties are likely to confront them. For one, the global outlook is highly unsettled. Disruptions in European energy markets threaten production and dampen consumer sentiment, with many forecasters suggesting that a recession in the euro area is unavoidable. In China, the pandemic remains a threat, both to public health and to economic activity. Overall, the global outlook does not suggest much of a buffer for the U.S. economy if growth were to slow appreciably more here.”

“Another source of uncertainty for policymakers is the tremendous amount of liquidity that remains in the financial system. Households for example are holding an additional $4 trillion in currency and checking accounts relative to pre-pandemic levels.1 This additional money coincides with a sharp increase in saving during the pandemic, as spending was curtailed, and government transfer programs attempted to preserve household incomes.”

“How households manage this additional excess saving over time could have important implications for the path of policy. If they decide to hang on to higher levels of liquidity, perhaps out of a renewed sense of caution given the experience of the pandemic shock, then the effect on the economy, inflation, and policy could be minimal. If instead, this higher liquidity allows households to boost spending, the outcome could be continued pressure on imbalances and inflation. Such a scenario might call for further increases in interest rates to incentivize saving rather than spending.”