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Federal Reserve Speeches·

Waller, Policy Risks Have Changed

  • The Federal Reserve faces uncertainty regarding the duration & economic impact of the Middle East conflict, which has constrained supply & raised prices for petroleum & other goods.
  • FOMC member Christopher Waller supports removing the "easing bias" from policy statements to reflect that rate cuts are no more likely than rate increases given recent inflation data.
  • Current policy stance is to hold rates steady for the near term, though future rate hikes cannot be ruled out if inflation remains unanchored or fails to abate.
  • Real GDP grew at a solid pace driven by AI-related business investment & resilient consumer spending, despite record-low consumer sentiment due to higher prices.
  • The labor market appears stabilized with an unemployment rate of 4.3%, though job creation is historically low due to an aging population & low net immigration.
  • Headline inflation rose in April with energy prices jumping 3.8%, while core PCE inflation reached 3.3%, the highest level in two and a half years.
  • Input costs for manufacturing firms have surged to levels last seen during the pandemic, raising concerns that energy shocks may bleed into broader price increases.
  • Waller applies a Bayesian framework to suggest that a sequence of price shocks may cause agents to perceive higher probabilities of future inflation, potentially unanchoring expectations.
  • The FOMC has missed its 2% inflation target for over five years, creating a risk that recent price escalations could permanently alter inflation expectations.
  • Future policy moves will depend on data regarding the conflict's length, the persistence of inflation, & whether inflation expectations remain anchored.