Thank you, Dean Dunham and the University of St. Thomas for the opportunity to speak to you today.1 Given that this event is co-sponsored by the Notre Dame Club of Minnesota, and I taught at Notre Dame for 13 years, I will lead off with this thought: Go Irish!
When I last spoke on January 16, the data we had received up to that point was very good—three- and six-month measures of core personal consumption expenditures (PCE) inflation were running right at 2 percent, which is our goal for total inflation, the labor market was cooling but still healthy, and real gross domestic product (GDP) was likewise growing but expected to moderate in the fourth quarter. I argued then that the data was “almost as good as it gets.” And I argued that because the economy was doing so well, we could take our time and collect more data to ensure that inflation was on a sustainable 2 percent path. There was no rush to cut rates any time soon.
Since then, we received data on fourth quarter GDP as well as January data on job growth and consumer product index (CPI) inflation. All three reports came in hotter than expected. GDP growth came in at 3.3 percent, well above forecasts. Jobs grew by 353,000, well over forecasts of less than 200,000, and monthly core CPI inflation came in at 0.4 percent, which was much higher than it had been for the previous six months.
So, the data that we have received since my last speech has reinforced my view that we need to verify that the progress on inflation we saw in the last half of 2023 will continue and this means there is no rush to begin cutting interest rates to normalize monetary policy.
Last week’s report on consumer prices in January was a reminder that ongoing progress on inflation is not assured. The uptick in inflation in that report was spread widely among goods and services. This one month of data may have been driven by some odd seasonal factors or outsized increases in housing costs, or it may be a signal that inflation is stickier than we thought and will be harder to bring back down to our target. We just don’t know yet. While I believe inflation is likely on track to reach 2 percent in a sustainable manner, I am going to need to see more data to sort out whether January’s CPI inflation was more noise than signal. This means waiting longer before I have enough confidence that beginning to cut rates will keep us on a path to 2 percent inflation.
Fortunately, the strength of output and employment growth means that there is no great urgency in easing policy, which I still expect we will do this year. More data, and more time, will tell whether January’s CPI report was just a bump in the road to 2 percent inflation. The hotter-than-expected data that we received validates the careful risk management approach that Chair Powell has advocated in his recent public appearances. And, with most data indicating solid economic fundamentals, the risk of waiting a little longer to ease policy is lower than the risk of acting too soon and possibly halting or reversing the progress we’ve made on inflation.
Let me start with the outlook for economic activity, including what we have learned from the latest data. As I mentioned, real GDP grew strongly in the second half of 2023 and that momentum has led forecasters to predict continued solid growth in the first months of 2024. After expanding at a 4.9 percent pace in the third quarter last year and at a 3.3 percent clip in the fourth quarter, estimates for the first quarter of 2024 range from 1.7 percent for the Blue Chip average of private sector forecasters to 2.9 percent for the Atlanta Fed’s GDPNow model, which is based on the data in hand.
Among that recent data is the Institute for Supply Management’s January survey of purchasing managers. For non-manufacturing businesses, the index increased to a level consistent with moderate growth. Meanwhile, the manufacturing index, while…
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