Loretta Mester, Speech: Progress and Prudence, An Update on the Economy and Monetary Policy

Q&A Segment –

Balance Sheet & Fed Funds

“In terms of the balance sheet, by allowing assets to run off the balance sheet, that also, right, is tightening financial conditions.”

“So we’re seeing the effects of both the tightening of the Fed funds rate, the increase in interest rates and that reduction in the balance sheet on the economy. And that also figures into our policy goals, but our active tool is the Fed funds rate, that policy rate. We set in motion, last year, that reduction in the balance sheet according to a plan, and we’re continuing to follow that plan. And as assets run off, of course, the balance sheet is reduced and we get that tightening effect. But that isn’t really the active tool. We’re having that run sort of in the background and then using our policy tool as the tool, active tool, in monetary policy.”

Soft Landing

“The soft landing of course is what we’re aiming for, which is we get inflation on a sustainable downward path of 2%. And I like to explain to people, that doesn’t mean we keep raising interest rates until inflation gets back to 2% because we know that our policy actions affect the economy. It takes time for them to feed through. But we do need to get to a point where we’re convinced that inflation is moving back down to 2%. In this environment, I do think we’re going to have very slow growth.”

Recession

“But the economy has been very resilient and the labor market has been very strong. So my anticipation would be even if that were to happen (a recession), it wouldn’t be a sharp downturn, which is the hard landing and that we will get inflation meaningfully down this year and continuing to fall over the next couple of years. We probably will see some rise in the unemployment rate, but it’s very, very low now and unsustainable low when you think about where we need to get back to have that healthy balance in the economy.”

Speech Segment –

Fed Funds

“I anticipate that monetary policy will need to move somewhat further into restrictive territory this year, with the fed funds rate moving above 5 percent and the real fed funds rate staying in positive territory for some time. Precisely how much higher the federal funds rate will need to go from here and for how long policy will need to remain restrictive will depend on economic and financial developments.”

“We are much closer to the end of the tightening journey than the beginning.”

GDP

“Output growth will likely be well below trend this year and pick up a bit next year.”

Jobs

“I expect that employment growth will continue to slow and the unemployment rate, which is very low, will begin to rise, to about 4-1/2 to 4-3/4 percent by the end of the year.”

Inflation

“I expect to see meaningful improvement in inflation this year, with inflation moving down to about 3-3/4 percent this year, continuing to improve next year, and reaching our 2 percent goal in 2025.

“Price stability is critical for the long-run health of the labor market, the overall economy, and the stability of the financial system. So it would be a mistake to declare victory before the job is done. Here, I am reminded of the words of former Fed Chair Paul Volcker when 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.”