The Atlanta Fed

March 4, 2024

I often say that being the Atlanta Fed president is the best job I've had. Among the things I love about my job is that it's never dull. I get to talk to people from numerous walks of life all over the Southeast and the country and learn from their interesting perspectives about how the economy is and is not working for them. And tracking the US economy is endlessly fascinating because it's always changing, so there is always something new to learn.

The flip side is there's always something to fret over. I often say that I get paid to worry, and, though I usually say it jokingly, there is real truth to that.

So, where is my attention, or worry, focused these days? Let me communicate that by relating three messages that encapsulate my monetary policy stance in this moment.

But before I get into that, you already know that the Federal Open Market Committee decides on monetary policy, most notably by setting the federal funds rate, which influences various market interest rates including those that lenders assess for auto loans, mortgages, and business loans. You may not know that the roster of voting Committee participants shifts every year. This year, I'm on the roster of voters, which is a distinct privilege. But that reality doesn't change the fact that in this message I speak only for myself and not anyone else on the Committee.

Inflation has slowed but risks remain

Message one begins with price stability. Inflation decelerated more quickly than even optimists expected over the past year, declining from over 5 percent to 2.6 percent during 2023, as measured by the Fed's preferred yardstick, the Personal Consumption Expenditures (PCE) price index.

I believe inflation is on track to slowly return to the Committee's 2 percent objective, alongside a strong labor market and expanding economic activity. That's unusual. Typically, unemployment rises when the Fed tightens monetary policy to subdue outbreaks of inflation like the one we experienced beginning in 2021. So, a return to price stability without deep economic pain would constitute a resounding success by historical standards.

Just how different is this episode? Research tells us that when the Fed tightened policy aggressively in previous cycles, the unemployment rate rose by about 1.5 percentage points, on average. That hasn't happened this time, so far at least. When the Committee began raising the federal funds rate in March 2022, unemployment was 3.6 percent. After 11 rate hikes, January's unemployment rate stood at 3.7 percent.

The unemployment rate has remained benign as monthly employment growth has held up remarkably well. Revisions from the Bureau of Labor Statistics bumped up the job growth numbers for late 2023, and the original report for January exceeded all expectations. Importantly, data also showed that job creation in January broadened beyond the small number of sectors—notably, health care—that had accounted for an outsize share of growth in the second half of 2023. I don't overreact to one month's data, to be sure. But a job market that had been cooling—effectively slowing to a normal state—has shown fresh signs of strength.

The story is similar for economic growth. Econometric evidence suggests that past tightening cycles led to about a half-percentage-point decline in real gross domestic product over two to two-and-a-half years—a recession, basically. Bucking that history, real GDP grew at a 3.3 percent annual rate in the fourth quarter of 2023 by the Bureau of Economic Analysis's initial estimate, and at a 3.1 percent clip for all of 2023. That's a more robust performance than private sector forecasts anticipated and, quite frankly, more robust than what we at the Atlanta Fed expected.

As promising as that all sounds, the resounding success I mentioned—a return to price stability without economic pain—is hardly assured. That is largely thanks to the second of my three points: because uncertainty is rampant in the domestic and global economies, it is premature to claim victory in the fight against inflation.

January inflation readings came in surprisingly high, the latest reminder that the path to price stability is not a straight line. I need to see more progress to feel fully confident that inflation is on a sure path to averaging 2 percent over time. Only when I gain that confidence will I feel the time is right to begin lowering the federal funds rate to dial back restrictive monetary policy.

That brings me to my third point. Uncertainty emanates from widely varying risks. Some risks stem from good economic news. These are what economists would call "upside risks" to my economic and policy outlook, and continued strong progress on inflation and job growth count among them.

There is another upside risk I'll highlight. As my staff and I have talked to business decision-makers in recent weeks, the theme we've heard rings of expectant optimism. Despite business activity broadly moderating, firms are not distressed. Instead, many executives tell us they are on pause, ready to deploy assets and ramp up hiring when the time is right.

I asked one gathering of business leaders if they were ready to pounce at the first hint of an interest rate cut. The response was an overwhelming "yes."

If that scenario were to unfold on a large scale, it holds the potential to unleash a burst of new demand that could reverse the progress toward rebalancing supply and demand. That would create upward pressure on prices. This threat of what I'll call pent-up exuberance is a new upside risk that I think bears scrutiny in coming months.

Price pressures are still widespread

Further, while headline inflation is moving in the right direction, a closer analysis reveals that it's not time to give the all-clear signal. First, the number of individual prices that are climbing briskly is still higher than we typically see when inflation is under control. The share of items in the PCE price index rising at rates above 5 percent remains well above the roughly 20 percent share that would be consistent with inflation at its target. So, price pressures are still a little broader than I'd prefer.

Second, one of the many inflation metrics my staff and I follow is the Dallas Fed's trimmed-mean PCE inflation tool. It removes outliers at the very high and very low ends of the price change distribution to arrive at a central tendency, and it has often been a good predictor of future inflation. Over the past several months, the Dallas trimmed-mean measure has been stuck at around a 2.6 percent annualized increase. That suggests that underlying inflation is still loitering just outside the neighborhood of 2 percent.

There are also downside risks to my outlook. Many of these involve geopolitical concerns. Conflicts in Europe and the Middle East haven't yet had significant impacts on energy markets, but they still could. Severe drought at the Panama Canal and terrorist actions in the Red Sea threaten to complicate global shipping and exert upward pressure on prices. Budget squabbles in the United States could rattle financial markets. There are other downside risks, but you get the idea.

Overall, on the topic of risks, one takeaway from all this is a recognition that the risks to achieving price stability have balanced out. That is, there are now two ways things could go wrong.

For most of this inflationary episode, we have focused primarily on bringing down inflation. That has meant tightening monetary policy. The central risk, then, was not tightening enough and thus allowing inflation to flourish unabated.

Now, as headline inflation has come down and the nominal policy rate has stayed restrictive, there is a risk of keeping interest rates elevated for too long and inflicting unnecessary damage on the labor market and macroeconomy. On the other hand, there is a still a risk of unintentionally going too easy on inflation—unwinding policy restriction too soon. That would risk allowing inflation to stall at a level above our 2 percent target, or even giving the economy such a boost that a flare of new activity sparks renewed price pressures and the inflation rate begins to climb.

So, we seek a delicate balance: keep the economy thriving without allowing high inflation to persist. Finding that balance won't be easy. The good news is the labor market and economy are prospering, furnishing the Committee the luxury of making policy without the pressure of urgency. Of course, that can change.

In closing, let me say that while formulating monetary policy is a complex endeavor, I find it helpful to distill my views into a couple of key terms to communicate with the public and financial markets. In view of the policy context I've described, my watchwords now are grateful and vigilant. I am grateful for the substantial progress we have seen in reducing the inflation rate toward the Committee's target of an average of 2 percent over time. Yet I am vigilant in continually staying on the lookout for developments that could derail that hard-won progress.

Thank you for reading, and please explore our website for more useful and interesting information about the economy. After all, the economy belongs to all of us.