Thank you for inviting us to be a part of this year.1 As a former Kansas banker, it’s always great to hang out with Kansas bankers. I look forward to the opportunity to learn and discuss more about the issues affecting financial institutions and your communities, from oversight and regulation to how you and your customers navigate the current economic and financial environment.
Before we get into our conversation, I would like to offer some thoughts on the economy and monetary policy. As you probably know, at our last meeting in July, the Federal Open Market Committee (FOMC) raised the target range for the federal funds rate by 25 basis points – to a range of 5-1/4 to 5-1/2 percent – and we continue to reduce Fed holdings. Since March 2022, the FOMC has been tightening monetary policy as part of our ongoing effort to bring down unacceptably high inflation. Since then we have seen some progress and inflation has come down from last year’s very high levels. Most recently, the CPI for June showed lower core inflation, a measure that excludes food and energy prices, after more than six months of stubbornly high readings. While this development is a positive sign that monetary policy is helping to lower inflation, both headline and core inflation remain well above our 2% target.
At the same time, the economy and jobs have remained strong as the FOMC has tightened monetary policy. Real gross domestic product grew by a little more than 2 percent on an annual basis in the first half of the year, well above the expectations of many forecasters. Consumer spending has been resilient and the housing sector appears to be recovering with accelerating house price growth and a pick-up in housing starts. The latest jobs report showed a strong labor market with low unemployment and solid job gains. The pace of job growth has slowed, a sign that the supply and demand balance in the labor market is getting better. But the demand for labor continues to outstrip the supply of available jobseekers, fueling inflation.
The banking system remains strong and resilient. Although banks have tightened lending standards in response to higher interest rates and funding costs, there has been no sign of another sharp contraction in lending due to the stresses earlier this year, which would slow economic activity. Although loan balance growth has slowed, banks have continued to increase lending to households and businesses.
Given the strong economic data and still high inflation, I supported the FOMC’s decision in July to further raise the target range for the federal funds rate. I also think more rate hikes will likely be needed to put inflation on a path down to the FOMC’s 2% target.
The recent lower inflation read was positive, but I’ll look for consistent evidence that inflation is on a meaningful path down toward our 2 percent target as I ponder further rate hikes and ponder how long the Federal will last Funds rate must remain at a restrictive level. I will also watch for signs of a slowdown in consumer spending and signs of an easing in labor market conditions.
It is important to emphasize that monetary policy is not on a predetermined course. My colleagues and I will base our decisions on the incoming data and its impact on the economic outlook. We should remain poised to hike interest rates at a future meeting if incoming data suggests progress on inflation has stalled.
Returning inflation to our 2% target is necessary to achieve a sustainably strong labor market and economy.
1. The views expressed herein are my own and not necessarily those of my colleagues on the Federal Open Market Committee or on the Board of Governors. Back to the text
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