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Washington D.C., October 18, 2023 – U.S. Federal Reserve Governor Christopher J. Waller has said that while recent months have seen a surge in positive news concerning maximum employment and stable prices, concerns loom over the sustainability of this economic prosperity.
In an address at the Distinguished Speaker Seminar held at the European Economics and Financial Center in London, United Kingdom, Waller discussed two distinct scenarios that have been occupying the minds of Federal Reserve policymakers.
The first scenario, outlined in the September Summary of Economic Projections (SEP) by FOMC participants, contemplates a potential slowdown in the real side of the economy. This scenario aims to ease demand to better align with supply, thereby helping inflation move closer to the coveted 2 percent objective. If this scenario unfolds, it is likely that the policy rate will remain steady to facilitate the economy's desired evolution.
However, the second scenario keeps policymakers on edge, where demand and economic activity continue to surge. This scenario poses a risk of exerting persistent upward pressure on inflation, potentially halting or even reversing the progress made toward the 2 percent inflation target. To counteract this, timely action may be necessary, possibly involving further adjustments to the policy rate, to ensure that inflation returns to target levels and that inflation expectations remain anchored.
One of the key concerns raised by Waller is the significant increase in medium- and longer-term interest rates since July. The 10-year Treasury yield has witnessed a notable rise of approximately 90 basis points, whereas shorter-term maturities have experienced a smaller increase primarily early in the period. The factors contributing to this rate movement are multifaceted, including robust incoming data on third-quarter economic activity, worries regarding U.S. deficits and heightened Treasury issuance, geopolitical events, and a flight to safety. Waller emphasized that the evolution of these interest rates in the coming months will be closely monitored to assess their impact on financial conditions and economic activity.
Delving into recent economic data, Waller highlighted the strength of indicators for economic activity. Real gross domestic product (GDP) registered a growth rate of 2 percent annually in the latter part of 2022 and the first half of 2023. Recent data points to a potential acceleration in the third quarter, with consensus estimates projecting a 3.5 percent growth rate, as per the Blue Chip survey of business forecasters. The Atlanta Fed's GDPNow model suggests an even more optimistic outlook. Although the third-quarter GDP figures are pending release, it is evident that economic activity during July through September exceeded expectations, marking a significant upturn from earlier in the year.
As the Federal Reserve grapples with these contrasting scenarios, policymakers face the delicate task of balancing support for economic growth with the preservation of price stability. They will closely observe the evolving economic landscape in the coming months, with the realization that the choices made today will shape the path the U.S. economy ultimately follows.
You may read the Fed Reserve press release here.