christopher j waller : february's hot data releases speech ( via webcast ) by mr christopher j waller, member of the board of governors of the federal reserve system, at the mid - size bank coalition of america, los angeles, california, 2 march 2023. * * * thank you, raj, and thank you to the coalition for the invitation to be with you - virtually, at least. i don't want to take up too much of the time for our discussion but let me frame a few of the issues around inflation and the economic outlook. 1 last month we received a barrage of data that has challenged my view in january that the federal open market committee ( fomc ) was making significant progress in moderating economic activity and reducing inflation. i'm not the only one whose outlook has shifted. since the end of january, financial market participants have revised their outlooks in a way that has led them to mark up their expectations for the federal funds rate at the end of 2023 by about a half percentage point. the shift in the data started with a bang on february 1, with a big increase in the number of job openings in december that reversed the gradual easing over several months in what is a key indicator of tightness in the labor market. part of the fomc's plan to lower inflation is reducing this excess tightness, which has been driving elevated wage growth and contributing to high inflation. the job openings and labor turnover survey data can be noisy so, at times, there is a tendency to downplay large moves. but then on february 3, the job report for january showed a stunning 517, 000 increase in employment and the unemployment rate moved down to a level not seen in over 50 years. 2 these data indicated that, instead of loosening, the labor market was tightening. 3 a little over a week later, on valentine's day, instead of a box of chocolates, we got the consumer price index ( cpi ) inflation report for january and revisions to 2022. by this measure, not only had inflation stopped declining in january, it also slowed a lot less in the second half of last year than previously reported. 4 later that week, data on producer prices and last week's report on personal consumption expenditures ( pce ) prices reinforced these two points. retail sales for january also came in much stronger than expected, suggesting the economy was slowing less than it had appeared just a month earlier, a picture that was confirmed

does not require that the policy committee members adhere strictly to a particular econometric model or economic theory. economic forecasts, in central banks as in the private sector, typically reflect the output of a suite of models and statistical methods, plus a heavy dose of the judgment and insights of experienced economists. forecasts can also be structured to take into account model and data uncertainty - for example by down - weighting changes in variables, such as the output gap, that are known to be poorly measured ( williams, 2004 ). so long as policymakers and their staffs remain appropriately humble about their forecasting ability and their knowledge of the economy, proponents argue, forecast - based policies are likely to provide better results than simple feedback policies. supporters also point out that, in comparison with simple feedback policies, the forecast - based approach provides more guidance about how to incorporate judgment and special information into policymaking. as i have noted, advocates of both approaches agree that, in principle, good policy practice leaves scope for discretion and the use of expert judgment. but how, specifically, is this to be done? simple feedback policies, which presume a good deal of agnosticism about the economy ’ s underlying structure, do not provide a clear framework for answering this question, except in very qualitative terms. under a forecast - based approach, in contrast, the answer is straightforward : judgment or special information should affect policy choice to the extent that it affects the forecast or the risks to the forecast. for example, simulations of an econometric model may imply that policy a is likely to produce better outcomes than policy b ; but if expert judgment suggests that the model ’ s more realistically, the plan might include contingent elements ; for example, it might involve keeping the funds rate low unless inflation begins to rise, in which case rates would be allowed to rise as well. stipulating a policy plan, at least in general terms, is essential in the context of forecast - based policies, as specifying only the current value of the policy rate does not provide enough information to construct a forecast. forecasts do not take special information or circumstances fully into account, or that policy a entails some economic risks not captured by the model, then policy b may be preferred instead. what about the role of private - sector expectations in determining the effect of policy? again the information requirements of forecast - based policies are relatively more demanding. in contrast to the case of simple feedback policies, under a forecast - based