Tom Barkin, Speech: 2023 Economic Outlook

Inflation – Demand

“ Demand reduction in less interest-sensitive segments tends to take a bit longer. And remember that the pandemic era is still partly with us. Excess savings and the return of consumer borrowing to pre-pandemic levels are funding continued strong consumption, especially for services like travel. Billions in fiscal appropriations are still being distributed. Strong pandemic-era order pipelines and the need for inventory replenishment are sustaining businesses. Employers who fought hard to hire scarce workers are reluctant to fire them. The unemployment rate remains at the historically low rate of 3.5 percent (and we are still adding jobs, 223,000 in the December report) … Once demand weakens, studies estimate it can take another six to 12 months before those pullbacks quiet the rate of inflation.”

Inflation – December’s CPI

“To that end, the last three months’ inflation prints have been a step in the right direction, but I would caution that while the average dropped, the median stayed high. That’s because the average was distorted by declining prices for goods like used cars that escalated unsustainably during the pandemic. I saw one commentary celebrating that core CPI less shelter actually declined. But we all know what people care most about: food and gas and shelter.”

Inflation – No backing off

“I get a lot of questions about whether the Fed should remain this committed given that risk. I guess my simple answer is that everyone hates inflation, and we are the ones mandated to address it. The Fed’s objective isn’t to hurt the economy; it’s to reduce inflation.”

“The experience of the ’70s showed that if you back off on inflation too soon, it comes back stronger, requiring the Fed to do even more, with even more damage. If you change the target before it is achieved, as some have recently advocated, you put the Fed’s credibility at risk, which in turn increases the sacrifice required in order to control inflation. And if you think supply chain improvements and our actions to date are enough to bring inflation down quickly, then our more gradual rate path should limit the harm.”

Fed Funds

“Let me start by saying we still have work to do. Inflation is too high, and we will need to stay on the case until it is sustainably back to our 2 percent target. We have forecasted additional rate increases this year.”

“That said, we have slowed the pace of those increases. We moved quickly last year, but what we were doing was taking our foot off the gas. Now, with forward-looking real rates positive across the curve and therefore our foot unequivocally on the brake, it makes sense to steer more deliberately as we work to bring inflation down in the context of the lags I just discussed.”