Economic Update Lecture Notes

Key Goals

• Achieving maximum employment and stable prices.
• Significant progress towards these goals over the past two years.
  • Strong labor market with low unemployment.
  • Inflation reduction from 7% to 2.7%, but still above the target of 2%.

Monetary Policy Decisions

• Federal Open Market Committee (FOMC) retained the current policy interest rate.
• Continued reduction of securities holdings to maintain restrictive monetary policy.

Reason for Maintaining Policy

• Ensuring demand aligns with supply to reduce inflationary pressures.

Economic Developments

Economic Activity

• Solid pace of economic expansion.
  • GDP growth: 1.3% in Q1 (down from 3.4% in Q4 last year).
  • Private domestic final purchases grew 2.8% in Q1.
• Consumer spending slowed but remains solid.
• Investment in equipment and intangibles picked up.

Labor Market

• Balanced supply and demand conditions.
  • Average payroll job gains: 218,000 jobs/month (April-May).
  • Unemployment rate: 4%.
  • Nominal wage growth eased.
  • Jobs to workers gap narrowed.

Future Expectations

• Median unemployment rate: 4.0% by end year, 4.2% by end of next year.
• Continued labor market strength.

Inflation

• Overall PCE price increase: 2.7% (12 months ending April).
• Core PCE prices: 2.8%.
• Consumer Price Index (CPI): 3.3% (12 months ending May).
• Core CPI: 3.4%.

Future Inflation Projections

• SEP Projections: 2.6% this year, 2.3% next year, 2.0% by 2026.
• Long-term inflation expectations remain well anchored.

Monetary Policy Goals and Actions

• Dual mandate: maximum employment and stable prices.
• Maintenance of federal funds rate range: 5.25%-5.5%.
• Reduction of securities holdings to manage economic demand and reduce inflation.

Assessment of Risks and Adjustments

• Uncertainty in economic outlook; attentive to inflation risks.
• Conditions for rate reduction:
  1. Greater confidence in sustained inflation reduction towards 2%.
  2. Avoid premature reduction to prevent reversing progress.
• Careful assessment of data will determine future rate adjustments.

SCP Assessments

• Median Federal Funds Rate:
  • End of this year: 5.1%.
  • End of 2025: 4.1%.
  • End of 2026: 3.1%.
• Projections will adjust based on economic developments.

Public and Economic Impact

• Importance of restoring price stability for long-term benefits.

Community and Public Impact

• Fed's actions significantly affect communities, families, and businesses.
• Commitment to public mission in monetary policy actions.

Q&A Session Highlights

On Inflation Forecasts

• Current forecast: conservative.
• Recent inflation readings and projections indicate a gradual easing.

Impact of Monthly Data

• Monthly CPI and PCE readings influence projections and rate decisions.
• Data-driven approach to policy adjustments.