Bullard CFA Society ST Louis 05 Jan 2023
Bullard CFA Society ST Louis 05 Jan 2023
in 2023
James Bullard
President and CEO
Any opinions expressed here are my own and do not necessarily reflect those of the Federal Open Market Committee. 1
Introduction
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This talk
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GDP Growth Improves
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Improved real GDP growth
• After negative real GDP growth in the first half of 2022, GDP growth
appears to have improved in the second half of 2022.
• Third-quarter 2022 real GDP growth is now estimated to have been 3.2%
at an annual rate, and fourth-quarter 2022 tracking estimates now suggest
the economy grew at an above-trend rate in the fourth quarter as well.
• Year-on-year growth is slowing, according to incoming weekly data, and
the output gap remains positive.
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Improved growth in the second half of 2022
Sources: Bureau of Economic Analysis, Congressional Budget Office, Federal Reserve Bank of Atlanta and IHS Markit.
Last observation: 2022:Q3. Projections for Q4 are as of Jan. 3, 2023.
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Year-on-year growth is slowing to potential
Sources: Federal Reserve Bank of New York and Congressional Budget Office. Last observation: Week ending Dec. 24, 2022.
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Level of real output is slightly above potential
Sources: Bureau of Labor Statistics, FOMC’s Summary of Economic Projections (SEP), Congressional Budget Office and
author’s calculations. Last observation: November 2022.
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Assessing real GDP growth
• Real GDP growth now appears to have been stronger in the second half
of 2022 than previously thought after puzzling readings in the first half of
2022.
• Perhaps the best interpretation is that real GDP growth is slowing to be in
a neighborhood just below the potential growth rate of about 2% on a
year-on-year basis after stellar growth in 2021.
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Labor Market Performance Remains Strong
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Labor market performance
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Vacancies per unemployed person remain high
Sources: Bureau of Labor Statistics and author’s calculations. Shaded areas denote U.S. recessions. Last observation:
November 2022.
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The labor market situation is unprecedented
Sources: Bureau of Labor Statistics; R. Barnichon, “Building a composite Help-Wanted Index,” Economics Letters,
December 2010, 109, pp. 175-178; and author’s calculations. Last observation: November 2022.
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Unemployment insurance claims remain low
Source: U.S. Employment and Training Administration. Last observation: Week of Dec. 24, 2022.
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Inflation Is Too High, but Declining
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Inflation
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Inflation remains well above target
Sources: Bureau of Economic Analysis and Federal Reserve Bank of Dallas. Last observation: November 2022.
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Inflation Expectations Are Relatively Low
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Inflation expectations
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Inflation expectations are back to low levels
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Policy Rate Is Closer to Sufficiently Restrictive
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Sufficiently restrictive
• The policy rate is not yet in a zone that may be considered sufficiently
restrictive, but it is getting closer.
• The following chart was developed for a talk I gave in November.*
• The chart shows a zone for one conception of a “sufficiently
restrictive” policy rate, along with the actual level of the policy rate.
• It now appears that the policy rate will move into the sufficiently
restrictive zone during 2023.
* See J. Bullard, “Getting into the Zone,” remarks delivered at Greater Louisville Inc., Louisville, Ky., on Nov. 17, 2022.
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The sufficiently restrictive zone
Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Federal Reserve Bank of Dallas, Federal Reserve Bank
of New York, FOMC’s Summary of Economic Projections (SEP) and author’s calculations. Last observations: November
2022 and December 2022.
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2023: A Year of Disinflation?
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Disinflation prospects
• The real side of the economy seems to indicate GDP growing faster than
previously thought during the second half of 2022 plus a labor market
with unemployment below its longer-run level.
• A natural forecast is that the pace of quarterly growth will now moderate
and unemployment will rise to return to its longer-run level.
• Meanwhile, the FOMC has taken aggressive action during 2022, with
ongoing increases in the policy rate planned for 2023, and this has
returned inflation expectations to a level consistent with the Fed’s 2%
inflation target.
• During 2023, actual inflation will likely follow inflation expectations to a
lower level as the real economy normalizes.
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Related Issue
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Financial stability risks
• The policy rate was increased by 50 basis points at the most recent
FOMC meeting and by 75 basis points at each of the previous four
meetings. These moves have been part of a front-loading strategy to
move to an appropriately restrictive stance given very high inflation.
• It is possible that increased financial stress could develop in such an
environment.
• However, the transparency with which these increases have been
delivered, along with forward guidance, seems to have allowed for a
relatively orderly transition to a higher level of interest rates so far.
• The St. Louis Fed’s financial stress index is so far indicating a relatively
low level of financial stress despite the higher policy rate.
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Financial stress readings remain low
Source: Federal Reserve Bank of St. Louis. Last observation: Week of Dec. 23, 2022.
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Conclusion
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Conclusion
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