Christopher J Waller: Big shocks travel fast - why policy lags may be shorter than you think

Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the Money Marketeers of New York University, New York City, 13 July 2023. 

Central bank speech  | 
18 July 2023

Thank you. Whenever I get such a warm welcome, I always say to myself, "Waller, they really aren't here for you or your sparkling personality. They're here for your outlook." Which is fine, because accurately communicating my economic outlook is an important part of my job. Tonight, in addition to providing new information about my outlook based on new data, I also want to clarify my views on how the economy has been operating over time and my view of appropriate monetary policy. Doing so can help the public anticipate how I will react to new developments, not just at the next meeting of the Federal Open Market Committee (FOMC), but further into the future. That's crucial, because monetary policy works mostly by influencing the public's view of financial and economic conditions well into the future, affecting spending and investment decisions. Whether I say so or not, every time I speak, I am trying to better explain how and why I make policy decisions.

My plan is to cover three issues. First, by looking over the past few FOMC meetings, I want to describe how my outlook has been shaped by both economic data and uncertainty-what we have learned at each point and what we don't yet know about the economy. Second, I will discuss how I think about lags with which policy affects economic activity and inflation and the impact on the appropriate path of policy. And third, I will review the recent data and discuss how I see policy evolving over the remainder of this year.

Recent Policy Actions

At the June meeting, I supported keeping the policy rate unchanged. Based only on the economic data that was coming in showing a tight labor market and stubbornly high inflation, I believe that raising the policy rate 25 basis points was justified. However, I had lingering doubts about when or if an abrupt tightening of credit conditions would occur. I viewed the lingering effects of the banking stresses from March as a downside risk to cause a tightening of credit conditions. Although there did not appear to be a lot of evidence that a substantial credit crunch was in the works, I felt that waiting another six weeks was prudent risk management. In the end, I believed that risk management concerns slightly outweighed hiking based on the incoming data.