Esther George, Speech: Tightening Monetary Policy in a Tight Economy

“These different interpretations of the data underscore the high degree of uncertainty regarding where the labor market will ultimately settle. On the one hand, if labor demand eases and job openings fall, we should expect at least some rise in the unemployment rate. On the other hand, labor supply could increase as pandemic effects wane and the participation rate of older workers rises. All else equal, with more labor supply, the tightness of the labor market could ease without a substantial fall in labor demand.”

“The Federal Reserve’s monetary policy cannot, of course, reverse the supply shocks that have boosted inflation. It can, however, moderate the pace of demand growth to narrow imbalances in the economy and reduce price pressures.”

“First, communicating the path for interest rates is likely far more consequential than the speed with which we get there. Moving interest rates too fast raises the prospect of oversteering. It is notable that even before the March increase in the target range for the federal funds rate, Treasury yields had already moved up significantly and financial conditions were tightening, as expectations were building for significant adjustments in monetary policy. And indeed, the adjustment has been significant. This is already a historically swift pace of rate increases for households and businesses to adapt to, and more abrupt changes in interest rates could create strains, either in the economy or financial markets, that would undermine the Fed’s ability to deliver on the higher path of rates communicated. Along these lines, I find it remarkable that just four months after beginning to raise rates, there is growing discussion of recession risk, and some forecasts are predicting interest rate cuts as soon as next year. Such projections suggest to me that a rapid pace of rate increases brings about the risk of tightening policy more quickly than the economy and markets can adjust.”