Christopher J Waller: Challenges facing central bankers

Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the Organisation for Economic Cooperation and Development (OECD) seminar series "The Lectures of the Governor", Paris, 8 January 2025.

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

Central bank speech  | 
14 January 2025

Thank you, Alvaro, and thank you for the honor of initiating this new series of lectures from central bankers. I will begin with a few words on the U.S. economic outlook and the implications for monetary policy. But on this occasion, I thought it appropriate to then widen my perspective, to address what I see as the leading challenges that OECD economies face that are of particular importance to central bankers in how we approach monetary policy and our other responsibilities.

I continue to believe that the U.S. economy is on a solid footing. Real gross domestic product (GDP) growth has been above 2 percent for eight of the last nine quarters and is expected to grow above 2 percent in the fourth quarter of 2024. Despite this robust economic growth, the labor market softened over 2024, and employment is now near what I judge to be the Federal Open Market Committee's (FOMC) maximum-employment objective. I have seen nothing in the data or forecasts that suggests the labor market will dramatically weaken over coming months.

With regard to inflation, after a period of rapid disinflation in 2022 and 2023, progress appears to have stalled in the final months of 2024. Our latest reading of core personal consumption expenditures (PCE) inflation is 2.8 percent for the 12 months ending in November. This is down just a bit from where it was a year earlier, at 3.2 percent. This minimal further progress has led to calls to slow or stop reducing the policy rate. However, I believe that inflation will continue to make progress toward our 2 percent goal over the medium term and that further reductions will be appropriate.

Let me explain why I expect inflation to continue toward our goal. First, as we saw a year ago when inflation briefly increased, progress has been uneven, but disinflation is more apparent if one smooths through the recent upticks. To tease out the underlying trend in inflation, I often look at the six-month percent change in core PCE prices, which is 2.4 percent at an annual rate for November and has mostly been moving down toward 2 percent over the course of the year. Second, the monthly reading for November came in much lower than expected at 0.11 percent after rising 0.26 percent in October. Third, inflation in 2024 has largely been driven by increases in imputed prices, such as housing services and nonmarket services, which are estimated rather than directly observed and I consider a less reliable guide to the balance of supply and demand across all goods and services in the economy. These two categories represent about one-third of the core PCE basket. If you look at the prices associated with the other two-thirds of core PCE, they on average increased less than 2 percent over the past 12 months through November. I don't support ignoring our best measures of prices for housing and non-market services, but I find it notable that imputed prices, rather than observed prices, were driving inflation in 2024 and thus expectations of the policy rate path. Finally, the higher inflation readings from early in 2024 will begin to drop out of inflation numbers in January. This should result in a significant step-down in the 12-month inflation numbers through March.

Looking further forward, geopolitical conflict could boost prices, as it has at times in recent years. In addition, tariff proposals raise the possibility that a new source of upward pressure on inflation could emerge in the coming year. Projections of the economic impact of these possible policy changes vary widely. If, as I expect, tariffs do not have a significant or persistent effect on inflation, they are unlikely to affect my view of appropriate monetary policy. Of course, we need to see what policies are enacted before we can seriously consider their effects.