Introduction
Thank you for the warm welcome, Bruce, and for the chance to address you today. It’s a pleasure to be back in Sydney and reconnect with familiar sights, like the iconic Opera House.
Current U.S. Economic Overview
General Economic Health
As I assess the current state of the U.S. economy, it appears to be performing reasonably well overall. However, the challenge of reducing inflation has been inconsistent. After two months of promising inflation data in November and December, January’s figures were disappointing, indicating that progress toward our 2% inflation target remains shaky.
My view is that the existing monetary policies are somewhat limiting economic activity and exerting downward pressure on inflation. If this lull in progress proves temporary, as it did last year, we may need to consider easing policies further. For now, I believe it’s best to maintain the current policy rate.
Resilient Consumer Spending
Household and business spending has demonstrated resilience, contributing to robust growth in the real gross domestic product (GDP). Recent employment data, including revisions for most of 2024, supports a strong labor market outlook.
Despite the recent high inflation readings, which surprised many, we saw positive changes later last year. The crucial question now is whether or not we will witness similar improvements later in 2025, as we did in 2024.
Importance of Inflation Monitoring
Influencing Policy Decisions
Tracking inflation is critical for policymakers as it impacts whether adjustments to monetary policy are necessary. The strong labor market partly influenced my support for the Federal Open Market Committee’s (FOMC) decision to keep policy rates steady at the end of January.
In light of the solid labor market data and concerns over a seasonal inflation spike in January, it made sense to hold our position steady during our January meeting. This caution was justified given last week’s inflation data.
Addressing Economic Uncertainties
Some discussions after the FOMC meeting attributed our decision to uncertainty about the new administration’s policies. While uncertainty is always present in economic policy, decision-making should rely on incoming data.
Historical Examples of Uncertainty
Let me share two instances where the FOMC acted despite significant uncertainty.
March 2022: Inflation was surging when Russia’s invasion of Ukraine created global economic turmoil. Despite this uncertainty, the FOMC raised the policy rate for the first time since 2019 and implemented several large hikes afterward.
- March 2023: Concerns arose from the failures of banks, leading to fears of financial instability. Many suggested halting rate hikes. Nevertheless, the Federal Reserve, in collaboration with various governmental agencies, continued to adjust rates to combat inflation.
These examples illustrate that monetary policy cannot simply be paused in the face of uncertainty.
Economic Data Insights
GDP and Consumer Spending
The fourth quarter of the year saw solid GDP growth at 2.3%. Notably, personal consumption expenditures (PCE), which make up about two-thirds of GDP, increased strongly by 4.2%. Households are in a stable position with adequate liquid assets to sustain spending, an encouraging sign fed by the current data for early 2025.
Labor Market Strength
The labor market remains strong, with an unemployment rate stabilized at around 4%. In January, employers added 143,000 jobs, slightly less than previous months’ averages but indicating ongoing job creation. Factors like cold weather have played a role in job numbers, but job vacancies are still plentiful.
Wage Growth Trends
Wage growth remains strong but is now more stable compared to previous years. Even though it slightly outpaces price increases, it does not appear to significantly hinder inflation reduction efforts. The average hourly earnings for January were a little higher, but fluctuations due to external factors, like bad weather, suggest caution in immediate judgments.
Inflation Insights and Challenges
Current Inflation Data
Recent inflation data was somewhat disappointing. For January, the total consumer price index (CPI) inflation registered at 0.5%, with core inflation at 0.4%. However, these figures show marginal improvements over the past year, although they remain higher than desirable.
Combining the latest consumer price data with producer price data indicates that forecasts for personal consumption expenditures inflation are not as dire as CPI figures suggest.
Seasonal Influences on Inflation
I’ve recognized a pattern where inflation readings tend to spike at the beginning of the year. This raises questions about residual seasonality—seasonal fluctuations that haven’t been fully adjusted by statisticians. Evidence suggests that these January spikes have occurred in 16 out of the last 22 years. I’ll be closely monitoring data in the coming months to see if we are experiencing a repeat of this pattern.
Outlook for Monetary Policy
Interest Rate Relationships
There’s been a noted divergence between long-term interest rates and the FOMC’s policy rate since we began lowering rates last September. Although we’ve cut policy rates by 100 basis points, yields on 10-year Treasury securities have increased. This disconnect arises because various global market factors influence long-term rates beyond just expected policy trajectories.
Future Economic Considerations
In terms of my economic outlook, the labor market appears balanced and resilient. However, inflation remains significantly above target levels, making it necessary for us to maintain a restrictive monetary policy while aiming to move inflation toward 2%.
For now, I believe pausing rate cuts is wise while we evaluate ongoing economic data. If we follow a pattern similar to that of previous years, a decision to cut rates may be warranted later this year.
Conclusion
As we observe economic data and any potential shifts in administration policy, our primary guide should remain the data itself. If changes indicate a need for further rate adjustments, we must act accordingly, avoiding policy paralysis due to uncertainty. In economic policy, letting hard data inform our actions is essential.
