Christopher Waller, Speech/Q&A: Financial Stabilization and Macroeconomic Stabilization, Two Tools for Two Problems
Q&A Segment —
Fed Funds
“Right. So up until March 10th when SVB failed, the data that was coming in January and February was just extremely hot. The economy was not showing any signs of slowing down. So at that time, I thought that our terminal interest rate, where we might think about stopping, was going to have to be much higher than what we projected in December, which was five and an eighth in terms of the interest rate.”
“So I started thinking we were going to have to go up to five and a half or five and a quarter or higher to deal with it. Once the SVP situation happened and credit conditions started to tighten, that takes some of the work off of me, because if the financial market tightens the non-price credit, I don’t have to do as much on the price side to tighten credit. So what that did is it kept me from pushing up my terminal rate and kept it where it was in December.”
“This is a silver lining in a bad cloud, but we’re going to let some of this tightening do the work for us so that we don’t potentially have to raise rates quite as much as I thought we would have to back in February.”
Inflation
“And a good sign we got in the CPI report is that we finally saw, instead of housing shelter costs going up at eight tenths of a percent per month, they only went up at 0.5, half a percent per month. And we expect that to keep coming down. So that should pull some of the persistence. That’s why most of us have inflation coming down to the three to three and a half range by the end of the year. Some of that persistence from housing will start fading away, and then we’ll get inflation a lot closer to our target by the end of the year.”
Speech Segment —
Fed Funds
“This success (providing liquidity to bank and guaranteeing deposits above $250,000) allowed us to focus on our macroeconomic objectives of price stability and maximum employment when setting the policy rate at our March FOMC meeting. Against this backdrop, the FOMC raised the policy rate 25 basis points without causing significant stress to the financial system. To date, that decision has been validated.”
“A significant tightening of credit conditions could obviate the need for some additional monetary policy tightening, but making such a judgement is difficult, especially in real time.”
“The Atlanta Fed’s gross domestic product (GDP) growth tracker, which reflects the most up-to-date data, estimates that gross domestic product grew by 2.2 percent in the first quarter, in line with many private sector estimates and higher than most estimates of potential growth provided by FOMC participants. This growth would mean that, so far, tighter monetary policy and credit conditions are not doing much to restrain aggregate demand.”
“Whether you measure inflation using the CPI or the Fed’s preferred measure of personal consumption expenditures, it is still much too high and so my job is not done. I interpret these data as indicating that we haven’t made much progress on our inflation goal, which leaves me at about the same place on the economic outlook that I was at the last FOMC meeting, and on the same path for monetary policy. Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further.”
“Another implication from my outlook and the slow progress lately is that, as of now, monetary policy will need to remain tight for a substantial period of time, and longer than markets anticipate … I would welcome signs of moderating demand, but until they appear and I see inflation moving meaningfully and persistently down toward our 2 percent target, I believe there is still work to do.”