Christopher Waller, Speech: The Economic Outlook and a Word of Caution on Inflation
Inflation
“Though welcome news, we must be cautious about reading too much into one inflation report. I don’t know how sustained this deceleration in consumer prices will be. But, as a snapshot, the 0.3 percent increase in core CPI inflation in October from September, (actually 0.27 percent rounded up) works out to an annualized rate of about 3.25 percent. I focus on core over headline inflation because I believe it is a better indication of future inflation. This increase is much improved from the past several months but still very far from our 2 percent target.”
“I cannot emphasize enough that one report does not make a trend. It is way too early to conclude that inflation is headed sustainably down … I will not be head-faked by one report and will continue to watch the data between now and the December FOMC meeting before deciding on the next step for policy.”
Fed Funds
“I am going to take a considerable risk here and employ an airplane simile to illustrate how I think of our past policy actions and where we are going. When an airplane is taking off, the pilot fires the engines as much as possible to get off the ground. The goal is to get to cruising altitude quickly, so the initial ascent is steep. But as the plane gets closer to cruising altitude, the pilot slows the rate of ascent, while continuing to climb. The final cruising altitude will depend on many factors, most notably details about the weather. Turbulence may force you to a higher or lower altitude, but you adjust as you go to have a smooth ride.”
“This is similar to our policy actions this year. When the Fed was faced with rapidly escalating inflation and a strong labor market, it lifted rates aggressively off the effective lower bound including several 75-basis-point steps. But as the policy rate gets higher, the stronger is the case for slowing the rate of ascent while continuing to climb. This would correspond to slowing to 50-basis-point hikes. At a certain point, policy will reach an optimal cruising altitude, but we don’t know exactly what that level will be because it depends on the data. Maybe new data will point to a shallower climb and a lower cruising altitude, which would suggest stepping down to 25-basis point hikes. Or maybe it could be necessary to continue climbing a little longer to a higher final attitude by implementing a sequence of 50 basis point hikes. In the end, the higher we raise the policy rate, the more pressing it is to think about the terminal rate and how policy should be adjusted to get there, but that will depend on the incoming data.”
“Looking toward the FOMC’s December meeting, the data of the past few weeks have made me more comfortable considering stepping down to a 50-basis-point hike. But I won’t be making a judgement about that until I see more data, including the next PCE inflation report and the next jobs report.
If the FOMC were to step down to a 50-basis-point increase, it is important to remember that this would still be a very significant tightening action—in other words, just pulling back on the rate of ascent a little bit. At this angle of ascent, with policy already in restrictive territory, the federal funds rate can still be increased quite rapidly with several 50-basis-point increases, a pretty aggressive path for policy.”