Regional President Speech

NONCONFIDENTIAL // EXTERNAL Monetary Policy in this Unusual Time Markus’ Academy Princeton University Bendheim Center for Finance February 29, 2024 Austan D. Goolsbee President and CEO Federal Reserve Bank of Chicago The views expressed here do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System. 1 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL Overview • 2023: The golden path and inflation dynamics − A great year for the dual mandate − Supply chains, labor supply, productivity growth − Are more favorable supply developments to come in 2024? • Inflation expectations barely moved: The role of the Fed − Credibility was an anchor • (If time) Non-bank financial institutions (NBFIs) and monetary policy transmission 2 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL 2023: The Golden Path and Inflation Dynamics 3 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL Huge decline in inflation without a recession Core PCE Inflation (Percent change) 7 6-month (a.r.) 12-month 6 5 4 3 Jan-2024 2 1 0 2017 2018 2019 2020 2021 2022 2023 2024 Source: BEA via Haver Analytics 4 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL Huge decline in inflation without a recession Change in Core PCE Inflation vs. Unemployment Gap 6% 5% 1982 4% p a G 3% t 1983 n 1975 e 1981 m 2% y o l p m 1% e n U 0% 2023 -1% -2% -4% -3% -2% -1% 0% 1% 2% 3% 4% Change in Core PCE Inflation Note: Core PCE inflation is the change from the previous year in Q4/Q4 core PCE inflation; unemployment gap is the difference between unemployment rate and CBO's estimate of the noncyclical rate of unemployment. Source: BEA, BLS, and CBO via FRED; staff calculations 5 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL Supply chain repair Global Supply Chain Pressure Index (Standard deviations from average) 5 4 3 2 1 0 Jan-2024 -1 -2 2017 2019 2021 2023 Source: FRBNY via Haver Analytics 6 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL Supply chain impulse response Response of Headline PCE Inflation to Global Supply Chain Index Shock Note: Blue shading indicates 68% confidence band Source: Liu, Zheng, and Thuy Lan Nguyen. 2023. “Global Supply Chain Pressures and U.S. Inflation.” FRBSF Economic Letter 2023-14. https://www.frbsf.org/wp-content/uploads/el2023-14.pdf. 7 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL Strong labor supply Labor Force Participation Rate (Percent) 64 63 Jan-2024 62 Trend 61 60 2017 2018 2019 2020 2021 2022 2023 2024 Note: Trend reflects the labor force participation rate expected in an economy with unemployment at its natural rate given the age, cohort, gender, and education composition of the labor force. Source: BLS via Haver Analytics; staff calculations based on Aaronson, Hu, Seifoddini, and Sullivan (2014) 8 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL Wage-price dynamics • In long run, inflation = wage growth - productivity growth​ • Is wage growth consistent with target inflation? − Wages stickier than prices, so be careful in making judgments • In short- and medium-run, prices lead unit labor costs − Barlevy, Gadi, and Luojia Hu. 2023. “Unit Labor Costs and Inflation in the Non- housing Service Sector.” Chicago Fed Letter No. 477. https://www.chicagofed.org/publications/chicago-fed-letter/2023/477 − Andrade, P., Brauning, F., Fillat, J.L., and G. Joaquim. 2024. “ Is Post-Pandemic Wage Growth Fueling Inflation?” Federal Reserve Bank of Boston, Current Policy Perspectives, 2024-1. https://www.bostonfed.org/publications/current-policy- perspectives/2024/is-post-pandemic-wage-growth-fueling-inflation 9 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL Productivity recovery: Hints of the ‘90s? Nonfarm Business Sector Productivity vs. Trend (Index 2017 = 100) 112 2023:Q4 110 108 Trend 106 104 102 100 98 2017 2018 2019 2020 2021 2022 2023 2024 Note: Trend calculated from 2007:Q1 to 2019:Q4 Source: BLS via Haver Analytics 10 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL Inflation Expectations Barely Moved: The Role of the Fed 11 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL Anchored inflation expectations – since the 2000’s 10-Year Inflation Expectations and Core PCE Inflation (Percent) 10 Core PCE 10-Year Inflation Expectations 8 6 4 2023:Q4 2023:Q3 2 0 1970 1980 1990 2000 2010 2020 Note: 4-quarter percent change in core PCE and a PCE consistent series for average inflation expectations over the coming 10 years constructed from the Hoey Survey, Survey of Professional forecasters, and a statistical model. Source: BEA via Haver Analytics, Federal Reserve Board 12 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL Rates are restrictive Real Federal Funds Rate (Percent) 8 6 4 2024-02-28 2 0 SEP long-run -2 -4 -6 2005 2010 2015 2020 Note: Federal funds rate target midpoint less 1-year ahead inflation swap rate. SEP long-run equal to longer run federal funds rate projection in the December 2023 SEP less the 2 percent inflation target. Source: Federal Reserve Board; Bloomberg 13 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL Nonbank Financial Institutions and Monetary Policy Transmission 14 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL Bank share of lending to nonfinancial business Lending Share Excluding Real Estate (Percent) 50 45 40 35 30 2022:Q4 25 20 1950 1960 1970 1980 1990 2000 2010 2020 Source: Federal Reserve Board Z.1 Financial Accounts of the United States 15 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL wwwwww..cchhiiccaaggooffeedd..oorrgg 16 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL Appendix 17 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL Core PCE inflation components 12-Month Percent Change 8 Core Goods Housing 6 4 Core Services ex Housing 2 0 Jan-2024 -2 2012 2014 2016 2018 2020 2022 2024 Note: Core goods are goods less food and beverages purchased for off-premise consumption and gasoline and other energy goods. Core services are services less electricity and gas. Food services are included, as is the case in BEA core PCE prices. Source: BEA via Haver Analytics; staff calculations 18 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL PCE housing detail vs. Zillow new rents PCE Rent and Owner-Equivalent Rent Subindexes & Zillow Observed Rent Index (12-month percent change) 16 14 Zillow Observed Rent Index 12 10 8 PCE Rent 6 PCE OER 4 Jan-2024 2 0 2017 2018 2019 2020 2021 2022 2023 2024 Source: BEA and Zillow via Haver Analytics 19 Monetary Policy in this Unusual Time NONCONFIDENTIAL // EXTERNAL Increased business formation U.S. Business Applications with Planned Wages (Number, seasonally adjusted) 70,000 60,000 50,000 Jan-2024 40,000 30,000 20,000 2016 2017 2018 2019 2020 2021 2022 2023 2024 Source: U.S. Census Bureau via Haver Analytics 20 Monetary Policy in this Unusual Time

Austan D. Goolsbee (2024, February 28). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20240229_austan_d_goolsbee

@misc{wtfs_regional_speeche_20240229_austan_d_goolsbee,
  author = {Austan D. Goolsbee},
  title = {Regional President Speech},
  year = {2024},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20240229_austan_d_goolsbee},
  note = {Retrieved via When the Fed Speaks corpus}
}