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Tom Barkin
President, Federal Reserve Bank of Richmond
Global Interdependence Center's Central Banking Series
Banque de France
Paris, France
"Thank you for that kind introduction and for having me here today. It has been over two years since central banks around the globe began our efforts to rein in inflation. I thought today I could spend some time looking back at what’s happened in the United States during that period, and then look forward to what might lie ahead. Let me caution that these are my thoughts alone and not necessarily those of anyone else on the Federal Open Market Committee or in the Federal Reserve System."
By the first quarter of 2022, the Fed’s preferred inflation measure — the personal consumption expenditures price index (PCE) — had climbed to 6.6 percent, more than triple our 2 percent inflation target. Demand was surging too. Nominal personal consumption growth was nearly 12 percent in that quarter, over three times the average growth seen in the prior decade. The Fed needed to take aggressive action, and we did. In March 2022, we kicked off our steepest tightening cycle in decades, raising the federal funds rate over 500 basis points in under 18 months. In parallel, we have also reduced our balance sheet by over $1.7 trillion.
To most observers, the implications of our aggressive actions were straightforward: high rates would bring down inflation but with unavoidable side effects: a pullback in demand and an increase in unemployment.
"You can see those expectations in the Survey of Professional Forecasters from the fourth quarter of 2022," said Barkin. "The median respondent expected the economy to slow considerably; GDP growth in 2023 was expected to be 0.7 percent — well below trend — and unemployment was expected to rise above 4 percent." The median forecasted that inflation would come down quickly to 2.9 percent by end-2023 and near target (2.3 percent) by end-2024.
Based on November 2022 fed funds futures curve projections, markets forecasted rates peaking at 4.89% before declining to 4.11% by Q2 2024.
"It’s fair to say most of those expectations have not played out," Barkin continued. "We didn’t end 2023 with sluggish economic growth; quite contrary: GDP grew at an annualized rate of 3.4 percent in Q4-2023." Unemployment remains low at around four percent for thirty consecutive months—the longest streak since '60s—and inflation surprised high at a rate of 3.4% annualized early this year while fed funds rate rose up-to-date at around 5.33%.
Barkin questioned why forecasts were off: "It is notoriously difficult predicting where economy heads; old joke being economic forecasting invented making weather forecasters look good."
He explored four areas—economic activity; labor; inflation; rates—to discuss regularities suggesting outcomes versus actual observations:
Economic Activity:
Soon after hiking began recession indicators flashed warnings like yield curve inversion summer '22 lasting now two years signaling potential recessions historically preceding eight last ones alongside Conference Board U.S leading indicator index signaling recession until recently but broader slowdown avoided despite higher rates/banking turmoil/geopolitical challenges partly explained consumer-led recovery strength.
Consumers comprising nearly seventy-percent U.S GDP resilient spending thanks excess savings pandemic era/stimulus checks/asset values up including S&P five-hundred index rising almost seventy-percent since late '19/home values fifty-percent same period supported new home construction given housing demand post-pandemic/mortgage refinancing/debt paydowns delaying exposure interest rate hikes allowing business investment fiscal spending AI-driven investment supporting demand even amidst constrained sectors banking/commercial real estate/housing development experiencing recessions yet overall avoiding broader slowdown so far resilient consumer spending wealthier stable saving less now three-point-six-percent half pre-pandemic levels likely sustaining valuations/unemployment remaining low further contributing resilience potentially long-term staying power dependent ongoing conditions remaining favorable according Barkin:
Labor:
Despite pessimistic forecasts Beveridge Curve relationship open positions-unemployment rate depicting downward slope expecting higher unemployment reduced labor demand initially occurring still adding average two-hundred-forty-eight thousand jobs monthly highlighting phenomena termed “labor hoarding” firms reluctant letting workers go given difficulties finding retaining employees past few years sectoral catch-ups leisure hospitality/government/healthcare social assistance contributing significant proportions job gains alongside skilled trades shortages construction/manufacturing/nursing evident regional tight labor market dynamics exampled county district manufacturing closure laying off thousand workers barely impacting stable low three-point-one-percent local unemployment illustrating continued tightness.
Inflation:
Intense focus inflation path diverging expectations partly attributed strong demand/labor market resilience noteworthy progress reducing supply chain issues energy production increases alleviating pressures immigration/labor force participation aiding stabilization while price-setting behaviors altered post-pandemic concluding ability increasing prices previously perceived impossible proving viable without major consequences driving businesses attempting leveraging pricing maintaining recovering margins noting goods sectors largely returning pre-pandemic norms whereas services/shelter lagging behind needing further adjustment effort per Barkin insights gathered conversing regional businesses revealing changing attitudes towards price-setting amidst persistent uncertainties regarding customer elasticity responses potentially signaling future trends necessary monitoring ongoing developments closely according remarks shared concluding thematic discussions highlighted agility adaptability key navigating complex evolving economic landscape acknowledging unique pandemic circumstances/model limitations underscoring flexibility essential adapting updated information continuously emerging context thereby guiding informed policy decisions accordingly.”
