Lael Brainard: Staying the course to bring inflation down

Speech by Ms Lael Brainard, Member of the Board of Governors of the Federal Reserve System, at the University of Chicago Booth School of Business, Chicago, Illinois, 19 January 2023.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Inflation has declined in recent months, which is important for American households, businesses, and consumers. Inflation is high, and it will take time and resolve to get it back down to 2 percent. We are determined to stay the course.

Financial conditions have tightened considerably over the last year as the Federal Reserve and foreign central banks have tightened policy. Real yields have risen significantly across the curve over the past year: 2-year yields on Treasury Inflation-Protected Securities (TIPS) have risen more than 4-1/2 percentage points to 2.1 percent, and 10-year TIPS yields have risen more than 2-1/4 percentage points to 1.2 percent. Short-term real interest rates have moved into decidedly positive territory. Mortgage rates have doubled.

Inflation has been declining over the past several months against a backdrop of moderate growth. Yesterday's industrial production index points to a significant weakening in the manufacturing sector, and the retail sales report points to a further moderation in consumer spending. Looking forward, weaker readings on real income, wealth, and sentiment, along with indicators of spending on services, such as the ISM services index, point to subdued growth in 2023. Real disposable personal income declined, on net, at an annual rate of 4.1 percent in the first three quarters of 2022, suggesting that recent consumption has been supported by running down pandemic savings and greater reliance on credit. In particular, savings among low-income households appear to be lower and to have declined more rapidly than was previously appreciated.