For release on delivery
10:45 a.m. EST (8:45 a.m. MST)
November 28, 2023

Reflections on the Economy and Monetary Policy

Remarks by
Michelle W. Bowman
Member
Board of Governors of the Federal Reserve System
at the

Utah Bankers Association and Salt Lake City Chamber
Banker and Business Leader Breakfast

Salt Lake City, Utah

November 28, 2023

It is a pleasure to join you this morning in Salt Lake City for the Utah Banker and
Business Leader Breakfast.' I find great value in engaging with and learning from the
experiences and perspectives of those who are directly engaged in the economy-
businesses and consumers, and those who support economic activity by providing access
to financial services through the broader financial system. These experiences help
provide context for the economic and financial data that we rely upon for our economic
analyses. I look forward to learning about how your businesses-and the clients and
communities you serve-are navigating the current economic and financial conditions.

Since joining the Board of Governors of the Federal Reserve System five years
ago this week, the U.S. economy has experienced a number of unique economic
challenges. In my remarks today, I will include some of my observations on a number of
economic developments that our economy has experienced during that time. I will also
consider the monetary policy actions taken by the Federal Open Market Committee
(FOMC) in response to these developments and conclude by highlighting several
uncertainties surrounding the economic outlook and how they affect my views about
appropriate monetary policy going forward. Prominent among these uncertainties are
whether supply-side improvements will continue to reduce inflationary pressures; the
extent to which the demand for goods, services, and labor will come into better balance
with supply given the current setting of monetary policy; and the level at which the
federal funds rate will be consistent with the FOMC's inflation and maximum-

employment goals in the longer run.

' The views expressed here are my own and not necessarily those of my colleagues on the Federal Open
Market Committee or the Board of Governors.

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The Post-Financial Crisis Economy and Monetary Policy

Five years ago, monetary policymakers faced a much different set of challenges
than those we face today. At that time, one of the primary concerns of the FOMC was
that inflation had consistently been running slightly below the Committee's 2 percent
inflation target, despite years of accommodative monetary policy following the 2007-08
financial crisis and subsequent recession. More broadly, many central banks around the
world were grappling with the prospect of structurally lower interest rates due to a variety
of factors including demographic changes and higher savings rates, lower potential output
and productivity growth, and greater investor demand for safe assets like Treasury
securities.

One central topic of discussion during FOMC meetings in 2018 and 2019, my
first year as a Governor and permanent voting member of the FOMC, was how monetary
policy strategies and tools could best achieve the Committee's dual mandate of price
stability and maximum employment in a world of structurally low interest rates and
disinflationary forces that kept inflation persistently under the Committee's 2 percent
target. Relatedly, there was an ongoing concern that the federal funds rate, the FOMC's
key policy rate, was too close to the "zero lower bound," which would limit the
Committee's ability to respond effectively to an adverse shock by lowering interest rates.
So much so that even during the economic expansion there was concern that the Fed
would likely be severely limited in its ability to stimulate the economy.

In 2018, the FOMC was nearing the end of a gradual monetary policy tightening
cycle that had begun in late 2015. At the time the FOMC had been slowly tightening

monetary policy, it had the benefit of a strong labor market, a steadily expanding

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economy, and inflation near 2 percent. The U.S. was also experiencing one of the longest
economic expansions in its history, with consistent labor market gains for all segments of
the workforce. During my first FOMC meeting in December 2018, the FOMC completed
this hiking cycle by raising the target range for the federal funds rate by 25 basis points to
2'% to 2'4 percent. The FOMC maintained this range until the second half of 2019, when
the Committee reduced the federal funds rate by a total of 75 basis points in response to
moderating economic growth and inflation and global economic uncertainties related to
expectations of lower U.S. growth.? Although the underlying issues were quite different,
there were similarities to the issues we face today. At that time, the Federal Reserve was
also in the process of normalizing the size of its balance sheet, which stood at just under
$4 trillion in December 2018.3

Then, in March 2020, the COVID-19 pandemic created an unprecedented shock
to the global economy and financial system. This shock-combined with the policy
responses of governments and central banks around the world-disrupted many of the
economic dynamics that had influenced the economy over the past several decades.
These impacts will affect how we think about monetary policy going forward, but let's

put the event and response into better context.

? See, for example, the discussion of risks and uncertainties at the July 2019 FOMC meeting, the first
meeting at which the target range for the federal funds rate was lowered. The minutes of the July 30-31,
2019, Federal Open Market Committee meeting are available on the Board's website at
https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm.

3 Securities runoff had begun in October 2017 when the Fed's securities holdings stood at nearly

$4.25 trillion. In October 2019, in response to a brief period of stress in short-term funding markets, the
FOMC began to expand the size of the Fed's securities holdings from a level of just over $3.5 trillion to
attain a level of ample reserves to the banking system in line with growth in the economy and banking
sector. See the October 2019 Federal Open Market Committee Statement, which is available on the
Board's website at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm.

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The Pandemic Policy Response and Economic Recovery

Widespread economic lockdowns and social isolation, combined with other
pandemic effects, caused the swiftest and deepest contraction in employment and
economic activity since the Great Depression. Many critical parts of the U.S. financial
system experienced significant disruption or completely ceased to function. The Federal
Reserve responded forcefully to mitigate the financial market turmoil and the economic
effects of the rapid shutdown of the U.S. economy. As a part of its response, the FOMC
quickly lowered the target range for the federal funds rate back to 0 to '4 percent and
began purchasing large amounts of Treasury and agency mortgage-backed securities.
These purchases were initially designed to support the smooth functioning of security
markets to support the flow of credit to businesses and households and, later, to provide
additional monetary policy accommodation to support economic activity and labor
markets.'

Central banks in other countries and jurisdictions also implemented
accommodative monetary policy to support their economies during the early phases of
the pandemic. In addition, fiscal authorities around the world implemented programs to
support labor markets and enable household and business spending. In the U.S., these
programs and policies included the Paycheck Protection Program and other CARES Act
programs designed to support businesses, households, and state and local governments.

These policies, combined with extremely accommodative monetary policies, bolstered

4 The Federal Reserve implemented 13 emergency lending and liquidity facilities under its emergency
lending authorities and undertook supervisory and regulatory actions to support the flow of credit to
households, businesses, and local governments. See "Funding, Credit, Liquidity, and Loan Facilities" and
"Supervisory and Regulatory Actions in Response to COVID-19" on the Board's website at

https://www. federalreserve.gov/funding-credit-liquidity-and-loan-facilities.htm and
https://www.federalreserve.gov/supervisory-regulatory-action-response-covid-19.htm, respectively.

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private-sector and local government balance sheets. They also resulted in what has come
to be referred to as "excess savings"-money that consumers would have spent otherwise
but couldn't, given a number of physical- and supply-related constraints.

The innovative approaches adopted by many American businesses-including
shifting to online sales and complying with social-distancing requirements to meet
government operating requirements-the excess savings, and the newly introduced
medical treatments supported a sharp economic rebound in 2021, with more than
5 percent real gross domestic product (GDP) growth in the first two quarters. Strong
demand, early retirements, generous fiscal support, very low legal immigration, and a
mismatch between available jobs and workers all contributed to a very tight labor market.
The unusually rapid rebound in economic activity, the pandemic-driven shift in consumer
spending toward goods, reduced manufacturing capacity in some sectors, and supply-
chain vulnerabilities led to crippling supply-chain bottlenecks in a number of areas.
Eventually, given these supply-demand imbalances amid accommodative fiscal and
monetary policies, inflation moved up to very high levels.

By the second half of 2021, inflationary pressures intensified and became more
broad based. Labor markets were extremely tight, though data available at the time did
not reflect the true extent of this tightness. Of the many difficult issues the Committee
faced at the time, one of the most important was whether the inflationary pressures would
be persistent or resolve as supply-side pressures eventually eased.

The June 2021 Summary of Economic Projections (SEP) showed the median

FOMC participant expected annual personal consumption expenditures (PCE) inflation to

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be 3.4 percent at the end of 2021 and to settle at 2.1 percent by the end of 2022.° Private-
sector forecasters expected slightly lower inflation of 2.9 percent at year-end 2021 and
projected it to be 2.3 percent by the end of 2022.° With the benefit of hindsight, we know
now that most forecasters, ourselves included, vastly misjudged the persistence of
inflation at that time, with PCE inflation of 5.9 percent for both 2021 and 2022. This
underscores the challenge we faced in discerning which factors were driving inflation and
how long those forces would persist.
High Inflation and the Response of Monetary Policy

In the second half of 2021, it became clear that the FOMC's monetary policy
stance was too accommodative in the presence of growing inflationary pressures and that
the Committee needed to move toward a tighter policy stance.' It seems likely to me that
the experience of the years leading up to the pandemic, when inflation was persistently
low, made it hard for forecasters to foresee how quickly that could change. Of course,
the inflation and labor data did not accurately reflect the economic conditions prevailing
at the time and were subsequently substantially revised. Together, these factors likely

also led to a delay in the removal of monetary policy accommodation in 2021.8 The

5 See the Summary of Economic Projections released following the June 2021 meeting of the Federal Open
Market Committee, which is available on the Board's website at
https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm.

6 Private-sector forecasts reflect the consensus estimate in the Blue Chip survey of business forecasters in
June 2021.

7 The median FOMC participant revised up 12-month PCE inflation to 4.2 percent and 2.2 percent for the
years 2021 and 2022, respectively, in the September 2021 SEP.

8 For example, both August and September 2021 employment reports suggested job growth at much lower
levels than consensus forecasts and were subsequently sizably increased. Similarly, based on current data,
PCE inflation for 2021:Q3 to 2022:Q2 are also revised higher. See the real-time data for macroeconomists
on the Federal Reserve Bank of Philadelphia's website at https://www.philadelphiafed.org/surveys-and-
data/real-time-data-research/pcon.

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monetary policy experience during the pandemic highlights how structural changes in the
economy can be difficult to identify in real time.

By November 2021, the target range for the federal funds rate was still at 0 to
Ys percent. And we continued to purchase assets at the same pace as earlier in the year,
although at our November 2021 meeting we announced that we would begin to slow the
pace of purchases later that month and in December.? At the December 2021 meeting,
we doubled the pace of tapering, which accelerated the end of purchases to the following
March.

The FOMC finally raised the target range for the federal funds rate by 25 basis
points and ended the purchase of Treasury and agency mortgage-backed securities at the
March 2022 meeting. And in May, the FOMC announced its plan to reduce the size of
the Federal Reserve's securities holdings-which then stood at around $8.5 trillion-
starting in June and at a pace much faster than in the previous episode of balance sheet
reduction.!° The FOMC also continued to increase the target range for the federal funds
rate over the course of 2022 at a pace much faster than in previous tightening cycles, as it
became clear that inflation was higher and more persistent than many forecasters had
expected. Twelve-month total PCE inflation peaked at 6.6 percent just before the June
2022 meeting, reflecting both high core inflation and higher energy and food prices,
which were influenced by geopolitical conflicts.

To date, the FOMC has increased the target range for the federal funds rate to

5'/ to 5'4 percent and has been reducing the size of the Federal Reserve's securities

° See the November 2021 Federal Open Market Committee Statement, which is available on the Board's
website at https://www.federalreserve.gov/monetarypolicy/fomecalendars.htm.

'0 See the May 2023 Federal Open Market Committee Statement, which is available on the Board's website
at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm.

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holdings, which now stand at just above $7 trillion. We have also seen significant
progress on bringing inflation down, so far without impairing the strength of the labor
market and economic activity.

Looking Ahead

At our most recent meeting, the FOMC voted to maintain the target range for the
federal funds rate at the current level and continue to run off the Fed's securities
holdings.!! Inflation readings have come in lower, with some of the improvement related
to a continued easing of supply-side pressures. But the level of inflation remains high,
with the most recent readings of 12-month total and core PCE inflation at 3.4 percent and
3.7 percent, respectively. And recent progress has been uneven. The economy has
remained strong as the FOMC has raised the federal funds rate, and recent data indicate
that economic activity accelerated in the third quarter, with real GDP growing at a
4.9 percent annual rate. The most recent employment report showed a continuation of
healthy job gains. Labor force participation has improved over the past year, with a
somewhat slower, but still strong, pace of job gains, a sign that labor market supply and
demand may be coming into better balance.

At our last meeting, I supported the FOMC's decision to hold the target range for
the federal funds rate at the current level as we continue to assess incoming information
and its implications for the outlook. But my baseline economic outlook continues to
expect that we will need to increase the federal funds rate further to keep policy
sufficiently restrictive to bring inflation down to our 2 percent target in a timely way.

However, monetary policy is not on a preset course, and I will continue to closely watch

"! See the October 2023 Federal Open Market Committee Statement, which is available on the Board's
website at https://www.federalreserve.gov/monetarypolicy/fomecalendars.htm.

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the incoming data as I assess the implications for the economic outlook and the
appropriate path of monetary policy.

There are several uncertainties surrounding my baseline outlook that will
influence my view of appropriate monetary policy going forward. First, much of the
improvement in inflation over the past year has been due to supply-side improvements,
such as improving supply chains, increases in labor force participation, and lower energy
prices. It is unclear whether further supply-side improvements will continue to lower
inflation. Some firms are now shifting their supply chains closer to home in place of
more global supply chains. Government policies such as the CHIPS and IRA Acts are
supporting these shifts by encouraging greater investment in developing domestic
manufacturing capacity, including for semiconductors and electric vehicle batteries. How
these investments work out over time may affect the productive capacity of the U.S.
economy. And while these investments have the potential to increase productive
capacity, over the next few years they may also create strong demand for labor and
equipment in areas without the necessary physical resources to support the development,
which may increase inflationary pressures. In my view, there is also a risk that over the
coming months higher energy prices could reverse some of the recent progress made by
supply-side improvements to bring overall inflation down.

Second, over the past year, the number of workers in the labor force has increased
from improved labor force participation and other factors, including recent growth in
work visa issuance for some immigrants. At the same time, the average pace of job gains
has slowed somewhat and vacancies have declined, a sign that labor supply and demand

may be coming into better balance. However, future gains in labor force participation

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may be limited, since prime-age labor force participation is currently higher than pre-
pandemic levels. It is also unclear whether all of the workers who retired or left the labor
force during the pandemic will eventually return.

We also know that pandemic-era education disruptions from school closures and
remote learning resulted in extensive learning losses. There is a real risk that these
learning losses will limit the productivity of the American workforce in coming years.
Over time, American workers who experienced these education disruptions may
overcome the pandemic-era learning losses, but today, as young people leave education
and transition into the work force, there is a risk that either the economy will experience
lower long-term trend growth, or that the divide between those who suffered learning
losses and those who did not results in vastly different economic and overall outcomes
for this generation of American workers.!"

The third of these uncertainties is the extent to which strong aggregate demand
and the composition of spending will continue and contribute to inflationary pressures
going forward. It is possible that consumption pattern changes that occurred during the
pandemic will prove durable. Prior to the pandemic, goods consumption comprised just
under one-third of overall consumption. During the pandemic, consumption shifted to a
greater proportion of goods, like home office and gym equipment, in part because
pandemic-related restrictions limited the opportunities available to consume services. As

we emerged from the pandemic, the initial expectation was a return to stronger services

'2 National Centre for Educational Statistics data show fall of 2022-23 school year cohort of 13-year-old's
score for reading and mathematics has declined to levels lower than 1992 levels, reversing steady gains
achieved since then; see "Scores Decline Again for 13-Year-Old Students in Reading and Mathematics" on
the Nation's Report Card's website at https://www.nationsreportcard.gov/highlights/Itt/2023. The decline
is more pronounced among students with lower scores.

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consumption, but goods consumption remains near 35 percent of overall consumption. If
goods consumption continues to be a greater proportion of overall consumption, the
expected deflationary effect from goods prices could be delayed.

There is also a risk to inflation from higher services consumption. With too few
workers to fill the number of existing job openings, a continued increase in the demand
for services may contribute to persistently high core services inflation. Additionally, a
lack of fiscal restraint could further contribute to inflationary pressures.

Another uncertainty is the reaction of economic activity and inflation to the
continuation of higher interest rates and tighter financial conditions. We don't yet know
the full extent of the effects of tighter monetary policy and financial conditions on
economic activity and inflation.'> There are some signs of interest rate sensitivity for
small business loans and corporate debt, and slightly higher delinquencies for existing
credit card accounts and auto loans, in comparison to before the pandemic. However, the
presence of cash buyers in the housing market has lowered some of the interest rate
sensitivity in the housing sector. Further, many households continue to hold significant
excess savings and are realizing ongoing savings from mortgages originated or

refinanced when interest rates were low.

'3 The literature points to a wide range of estimates regarding the effects of higher interest rates on the
economy. See, for example, Ander Perez-Orive and Yannick Timmer (2023), "Distressed Firms and the
Large Effects of Monetary Policy Tightenings," FEDS Notes (Washington: Board of Governors of the
Federal Reserve System, June 23), https://www.federalreserve. gov/econres/notes/feds-notes/distressed-
firms-and-the-large-effects-of-monetary-policy-tightenings-20230623.html; Nitish Sinha and Michael
Smolyansky (2022), "How Sensitive Is the Economy to Large Interest Rate Increases? Evidence from the
Taper Tantrum," Finance and Economics Discussion Series 2022-085 (Washington: Board of Governors
of the Federal Reserve System, December), https://www.federalreserve.gov/econres/feds/how-sensitive-is-
the-economy-to-large-interest-rate-increases.htm. For a case study and an overview, see V. A. Ramey
(2016), "Macroeconomic Shocks and Their Propagation," in John B. Taylor and Harald Uhlig, eds.,
Handbook of Macroeconomics, vol. 2A (Amsterdam: Elsevier), pp. 71-162.

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In considering business investment and interest rate sensitivity, the evidence has
been mixed.!* The most recent Richmond and Atlanta Federal Reserve CFO Survey
suggests that roughly 40 percent of respondents have already pulled back on investment
requiring financing at current interest rates.!° However, another 40 percent say that they
are not interest rate sensitive, their financing or borrowing is not influenced by rates, or
they do not know the level at which the rate would become an impediment.

Finally, given all of the considerations I have just discussed, it is not yet clear
whether the appropriate level of the federal funds rate will need to remain at a higher
level than before the pandemic in order to effectively foster low and stable inflation and
support full employment. In my view, given potential structural changes in the economy,
such as higher demand for investment relative to saving, it is quite possible that the level
of the federal funds rate consistent with low and stable inflation will be higher than
before the pandemic. In some respects, a higher longer-run level of the federal funds rate
would be a welcome development, as this would allow the FOMC to more effectively
respond to future negative economic shocks by lowering the policy rate. Structurally
higher interest rates might also lead to less concern about the possible financial stability
effects of reach-for-yield behavior, as higher interest rates ease pressure on institutions
like life insurance companies and pension funds that manage extended-duration

liabilities.

'4 See Steve A. Sharpe and Gustavo A. Suarez (2014), "Why Isn't Investment More Sensitive to Interest
Rates: Evidence from Surveys," Finance and Economics Discussion Series 2014-02 (Washington: Board

of Governors of the Federal Reserve System, January, revised September 2015),
https://www.federalreserve.gov/econres/feds/why-isn3 9t-investment-more-sensitive-to-interest-rates-
evidence-from-surveys.htm.

'S See Zach Edwards and Daniel Weitz (2023), "How Are Interest Rates Impacting Spending? Evidence
from the CFO Survey," Federal Reserve Bank of Richmond, Research & Commentary, September 27,
https://www.richmondfed.org/research/national_economy/cfo_survey/research_and_commentary/2023/202
30927 _research_commentary.

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Conclusion

In conclusion, I continue to see an unusually high level of uncertainty as I
consider current economic conditions and my own views on the outlook for the economy
and monetary policy. My colleagues and I will continue to make our monetary policy
decisions at each meeting based on the incoming data and the implications for the
economic outlook. I remain willing to support raising the federal funds rate at a future
meeting should the incoming data indicate that progress on inflation has stalled or is
insufficient to bring inflation down to 2 percent in a timely way.

We should keep in mind the historical lessons and risks associated with
prematurely declaring victory in the fight against inflation, including the risk that
inflation may settle at a level above our 2 percent target without further policy tightening.
Returning inflation to the FOMC's 2 percent goal is necessary to achieve a sustainably

strong labor market and an economy that works for everyone.