Fed's Mester: The PCE report shows that the Fed needs to do a little more

Thank you very much for inviting me to discuss this paper. It is a timely review for central bankers charged with lowering inflation to targets or, in the terminology of the authors, managing disinflation. I really enjoyed reading it. Before I begin, let me remind you that the views I will express today are my own and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System. My discussion time is limited. Therefore, I'll be selective. I will begin by briefly describing what the paper is about. Then, I will summarize the authors' takeaways from their analysis. Next, I will share my takeaways. Finally, I will offer some concluding remarks. So what is this paper about? Conceptually, the paper can be divided into three parts. In the first part, the authors review historical disinflationary episodes in the United States and other countries to see what lessons we might learn from past experience. In the second part, the authors present a simple, tractable model that relates interest rates, inflation, inflation expectations, and slack in the labor market. They use the model to make predictions about future inflation. In the third part, the authors provide advice to monetary policymakers on how to address the current situation; that is, how to manage disinflation. With that, let me cut to consideration of the authors' takeaways. The authors' first takeaway, based on past disinflation episodes in the United States and abroad, is that policymakers should expect that disinfl tweet at 10:15am: JEFFERSON: INFLATION DRIVEN BY FACTORS NOT SEEN HISTORICALLY tweet at 10:15am: JEFFERSON: FED'S CREDIBILITY IS HIGHER NOW THAN IN 1960S AND 1970S tweet at 10:15am: FED'S JEFFERSON: THE ARGUMENT THAT POLICYMAKERS SHOULD ACCEPT THAT DISINFLATION WILL BE COSTLY IS WELL-REASONED. tweet at 10:16am: FED'S JEFFERSON: ONGOING IMBALANCE BETWEEN SUPPLY AND DEMAND FOR LABOR SUGGESTS HIGH INFLATION MAY COME DOWN, ONLY SLOWLY.

I thank the organizers for inviting me to participate in this year’s U.S. Monetary Policy Forum. I have attended many of the forums, and this is the fourth time I have had the honor of being on the program. So I can say based on experience that the forum always chooses a topic of utmost importance for monetary policymaking and always successfully delivers a paper combining solid research and policy recommendations. This year is no exception. Over the past year, in the wake of rising inflation, the FOMC has taken deliberate action to remove monetary policy accommodation by raising the federal funds rate by 4‑1/2 percentage points and reducing the size of the Fed’s balance sheet through asset run-off. Returning the economy to price stability is an imperative for sustaining healthy labor markets and the U.S. standard of living. The very high inflation the economy has experienced for almost two years has been painful for households and businesses, especially those with fewer resources. High inflation also imposes longer-run costs on our economy because it distorts the decisions households and businesses make about building human capital and investing in R&D, plants and equipment, and other forms of physical capital. These decisions ultimately affect the pace of innovation, productivity growth, the potential growth rate of the economy, and improvement in our living standards. Incoming economic information shows that our monetary policy actions are having the intended effect of sl tweet at 10:16am: FED’S MESTER SEES INFLATION RISKS AS TILTED TO THE UPSIDE tweet at 10:16am: MESTER: ECONOMY DOES END UP IN RECESSION IN MOST DISINFLATIONS