philip n jefferson : the us economic outlook and considerations for monetary policy speech by mr philip n jefferson, member of the board of governors of the federal reserve system, at the 2023 international insurance forum, national association of insurance commissioners ( naic ), washington dc, 18 may 2023. * * * good morning, everyone. thank you for inviting me to speak. it is a pleasure to be here. i would like to use this opportunity to share with you my outlook on the u. s. economy, credit conditions, and monetary policy. before i start, let me remind you that the views i will express today are my own and are not necessarily those of my colleagues in the federal reserve system. aggregate economic activity despite heightened uncertainty, due to banking - sector stress, geopolitical instability, and the aftermath of the pandemic, i expect the economy to grow in the second quarter. the pace of growth, however, will be slower than what we observed in the first quarter, when real gdp increased at an annual rate of 1. 1 percent. my expectation is based mainly on data that showed weakening spending in recent months, and other data that imply moderating spending, including a sizable decline in april in consumer sentiment, as measured by the initial estimate of the university of michigan surveys of consumers. while my base case forecast for the u. s. economy is not a recession, i expect spending and gdp growth to remain quite slow over the rest of 2023, due to continued tight financial conditions, low consumer sentiment, and a decline in household savings that had built up after the onset of the pandemic. furthermore, i acknowledge that there are downside risks, among them the possibility that the degree of bank lending restraint and uncertainty could weigh on economic activity more than i expect. the labor market even as gdp growth has slowed, employment has continued to increase, and the current labor market is one of the strongest that u. s. workers have experienced in decades. the economy created 253, 000 jobs in april and the unemployment rate was 3. 4 percent, the lowest since 1969. job creation has been remarkably resilient to tighter financial conditions. employers have added an average of 280, 000 jobs a month this year. that's down from the 350, 000 a month created in the second half of 2022 but still robust. the tight labor market has boosted wages and other compensation for workers. wage growth has continued to run ahead of the pace consistent with 2 percent

of long - run expectations, suggesting that the anchoring of long - run inflation expectations in recent years may explain the finding of a marked decline in inflation persistence. anchoring of inflation expectations is not a deus ex machina. it must come from somewhere, and since milton friedman ’ s adage that “ [ i ] nflation is always and everywhere a monetary phenomenon ” is still true, monetary policy must be the source of the change in the evolution of long - run inflation expectations. during the 1960s and 1970s, the federal reserve and a number of other central banks maintained a policy stance that, inadvertently or not, was too easy on average and that allowed both actual and expected inflation to drift up markedly over many years. since the late 1970s, however, the federal reserve and many other central banks have increased their commitment to price stability, in both words and actions. the fed pursued preemptive strikes against rises in inflation in 1994 - 95, 1999 - 00, and in 2004 - 06, as well as preemptive strikes against potentially deflationary forces in the fall the frb / us series splices data from two surveys of expected long - run inflation – the hoey survey of financial market participants from 1981 through 1989, and the survey of professional forecasters from 1990 on. after splicing, a 50 - basispoint constant factor is subtracted from the series to put it on a pce price index basis, on the assumption that survey respondents reported their expectation for cpi inflation, not pce inflation. ( the average wedge between cpi inflation and pce inflation was about 50 basis points from 1980 through 2006. ) i have made a similar adjustment to the livingston survey data plotted in figure 3 to put it on a pce price basis. of 1998 and in 2001 - 04. the result has been not only low and stable inflation but also, as we have seen, a strong anchoring of long - run inflation expectations. the pursuit of more - aggressive monetary policy to control inflation and the achievement of anchored inflation expectations can also help explain the other stylized facts about inflation dynamics. with expectations of inflation anchored, any given shock to inflation – whether it is from aggregate demand, energy prices, or the foreign exchange rate – will have a smaller effect on expected inflation and hence on trend inflation. these shocks will then have a much less persistent effect on actual inflation. the recent experience with surging oil prices seems consistent with this story. the price of west texas intermediate crude oil rose from