Christopher Waller, Speech: February’s Hot Data Releases
Fed Funds
“Last month we received a barrage of data that has challenged my view in January that the Federal Open Market Committee (FOMC) was making significant progress in moderating economic activity and reducing inflation. I’m not the only one whose outlook has shifted. Since the end of January, financial market participants have revised their outlooks in a way that has led them to mark up their expectations for the federal funds rate at the end of 2023 by about a half percentage point.”
“Fortunately, we will get the next employment report and CPI release ahead of the March 21–22 FOMC meeting, information that will affect my assessment of the appropriate next step for monetary policy. If job creation drops back down to a level consistent with the downward trajectory seen late last year and CPI inflation pulls back significantly from the January numbers and resumes its downward path, then I would endorse raising the target range for the federal funds rate a couple more times, to a projected terminal rate between 5.1 and 5.4 percent.5 On the other hand, if those data reports continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data for January were released.”
Inflation (and Jobs)
“One implication of the strong labor market is that the FOMC’s maximum employment goal has been achieved and monetary policy can be utterly focused on fighting inflation. Any fear that we might face two-sided risk in achieving our dual mandate was blown away by the January employment numbers. But an excessively tight labor market complicates the path toward achieving price stability, because wages are growing faster than they have in decades, at a pace that may contribute to keeping inflation elevated.”
“Although inflation has been coming down since the middle of last year, the recent data indicate that we haven’t made as much progress as we thought. That assessment goes for both overall inflation, and “core” inflation, which strips out volatile energy and food prices and is a good guide to future price increases. And this holds for both CPI and PCE measures of inflation. Core CPI inflation over the last three months of 2022 was revised up from 3.1 percent (at an annual rate) to now be 4.3 percent. Similarly, the 2022 fourth quarter PCE inflation data was revised from 2.9 percent to 3.6 percent. And the three-month rates increased in January; even measures that trim out the largest and smallest price changes saw increases. These data underscore the view, as laid out in the FOMC’s December Summary of Economic Projections, that the fight to bring inflation down to our 2 percent target will be slower and longer than many had expected just a month or two ago.”