In a virtual address at the 2023 Santa Barbara County Economic Summit, Governor Christopher J. Waller of the Federal Reserve discussed the current state of the U.S. economy and the factors influencing his policy views. With the next meeting of the Federal Open Market Committee (FOMC) approaching, Governor Waller highlighted the need for further data and flexibility in determining the best course of action regarding the policy rate.
Governor Waller began by acknowledging the slowing pace of economic activity compared to the latter half of the previous year. While real gross domestic product (GDP) grew at a modest rate in the first quarter of 2023, conflicting data for the current quarter has made it challenging to assess whether growth is slowing or accelerating. Retail sales and industrial production showed improvement in April, following two months of decline or stagnation. Non-manufacturing businesses also expanded modestly during the same period, according to the Institute for Supply Management survey respondents.
Despite the economic slowdown, Governor Waller emphasized that the labor market remains tight and inflation remains high. The April employment report indicated solid job growth, although previous months were revised downward significantly. The unemployment rate reached its lowest point since 1969, while average hourly earnings rose at their fastest pace this year. However, indicators such as a decline in temporary-help employment, fewer job vacancies, and a reduction in job turnover raised concerns about a potential cooling labor market. Governor Waller stressed the importance of further loosening in the labor market to alleviate inflationary pressures.
Regarding inflation, Governor Waller expressed concern about the lack of progress in reducing inflation rates. Although headline inflation decreased slightly in April, core inflation, excluding food and energy, remained steady and significantly above the target level. Governor Waller highlighted specific concerns regarding core goods prices and rent increases, which contribute to overall inflation. The impact of recent fluctuations in housing market conditions on rent increases added to the uncertainty surrounding inflationary pressures.
Governor Waller also discussed the evolving credit conditions in response to recent bank failures and stress among mid-size banks. He emphasized the soundness and resilience of the banking system, thanks to decisive actions taken by the Federal Reserve, Treasury Department, and the Federal Deposit Insurance Corporation. However, the tightening of lending conditions and uncertainties regarding credit tightening could influence monetary policy decisions.
Governor Waller outlined three potential options for the upcoming policy decision: hiking, skipping, or pausing. He acknowledged the arguments for a rate hike based on the current economic data, indicating a lack of significant progress in inflation and economic activity. Alternatively, he recognized the need for caution due to the high level of uncertainty surrounding credit conditions and the potential downside risk of tightening credit combined with another rate hike. Lastly, Governor Waller mentioned the possibility of pausing rate hikes if the current stance of monetary policy is deemed sufficient to bring inflation down over time.
Governor Waller concluded by reaffirming his commitment to fighting inflation. He emphasized the importance of using policy tools as necessary to bring inflation down to the Federal Reserve’s 2 percent target. The upcoming labor market and inflation data, as well as the evaluation of credit conditions, will shape his decision-making process leading up to the June FOMC meeting.