Michelle W Bowman: Update on the economic outlook, and perspective on bank culture, M&A, and liquidity
Speech by Ms Michelle W Bowman, Member of the Board of Governors of the Federal Reserve System, at the 2024 CEO and Senior Management Summit and Annual Meeting, sponsored by the Kansas Bankers Association, Colorado Springs, Colorado, 10 August 2024.
The views expressed in this speech are those of the speaker and not the view of the BIS.
Thank you for the invitation to join you again this year. Just as banking and economic conditions continue to evolve, so too do bank regulatory and supervisory standards. I look forward to learning your perspectives on the evolving banking and economic conditions, and the banking agencies' approaches to regulation and supervision.
Economic and Monetary Policy Outlook
Before discussing my thoughts on bank regulatory matters, and in light of our recent Federal Open Market Committee (FOMC) meeting, I will begin by sharing my current views on the economy and monetary policy.
Over the past two years, the FOMC has significantly tightened the stance of monetary policy to address high inflation. At our July meeting, the FOMC voted to continue to hold the federal funds rate target range at 5-1/4 to 5-1/2 percent and to continue to reduce the Federal Reserve's securities holdings.
After seeing considerable progress last year, we have seen some further progress on lowering inflation in recent months. The 12-month measures of total and core personal consumption expenditures (PCE) inflation, which I prefer relative to more volatile higher-frequency readings, have moved down since April, although they have remained somewhat elevated and stood at 2.5 percent and 2.6 percent in June, respectively. The progress in lowering inflation during May and June is a welcome development, but inflation is still uncomfortably above the Committee's 2 percent goal.
Despite the recent good data reports, core PCE inflation averaged an annualized 3.4 percent over the first half of the year. And given that supply constraints have now largely normalized, I am not confident that inflation will decline in the same way as in the second half of last year. More importantly, prices continue to be much higher than before the pandemic, which continues to weigh on consumer sentiment. Inflation has hit lower-income households hardest, since food, energy, and housing services price increases far outpaced overall inflation over the past few years.
Economic activity moderated in the first half of this year after increasing at a strong pace last year. Gross domestic product (GDP) growth moved up in the second quarter, following a soft reading in the first quarter, while private domestic final purchases (PDFP) increased at a solid pace in both quarters. During the first half of 2024, PDFP slowed much less than GDP, as the slowdown in GDP growth was partly driven by volatile categories such as net exports, suggesting that underlying economic growth was stronger than GDP indicated. Unusually strong consumer goods spending last year softened in the first quarter of this year, largely accounting for the step-down in PDFP growth.