christopher j waller : economic outlook speech by mr christopher j waller, member of the board of governors of the federal reserve system, at the center for financial stability, new york, 19 november 2021. * * * it is a pleasure to speak today at the center for financial stability, and i look forward to our conversation. let me take the next several minutes to speak about the continued improvement of the u. s. economy, recent inflation data, and their implications for monetary policy. 1 i will also discuss the federal open market committee ’ s ( fomc ) recent decision to begin reducing monthly purchases of securities and how incoming data may affect the pace of tapering. finally, i will address issues concerning the size of our balance sheet. let me start with my views on the economy. since i last spoke on the subject exactly a month ago, the basic shape of my outlook hasn ’ t changed : the economy continues to grow and add jobs at a strong pace, making steady progress toward the federal reserve ’ s goal of maximum employment. new data shows that employment gains were better than first reported in august and september and were back to a strong level in october. but we also have learned that supply constraints — both bottlenecks and labor shortages — are having a larger and more persistent effect on the economy. due to a combining of those supply constraints with strong demand, inflation pressures are becoming more widespread and may last longer into 2022 than i thought they would. these factors haven ’ t dented my optimism that the strong recovery will continue but they have raised the risks that supply constraints may limit job gains and output growth, and that inflation may complicate the fomc ’ s management of monetary policy in 2022. these factors weighed on output growth in the third quarter, which was down considerably from the three months before but which i expect will rise again to a strong rate in the fourth quarter. the explanation for the downturn is the same story we have all been living through since march 2020 : the ups and downs of the pandemic. the delta variant and supply chain problems threw the economy off its very strong growth track in the third quarter, but i anticipate it will return to that path in the fourth quarter, as society continues to learn how to manage the disease and everimproving treatments reduce the likelihood of death and hospitalization. assuming another damaging covid - 19 variant does not arise this winter, i expect gross domestic product ( gdp ) to resume its robust

comes to alter reinvestment policy. as securities holdings declined, so did reserves in the banking system. in mid - september 2019, upward pressures emerged in funding markets as reserves dropped to about $ 1. 4 trillion or 6. 6 percent of gdp at that time. most thought the fed ’ s balance sheet could be reduced further. in fact, the median of the respondents to the june 2019 primary dealer survey conducted by the federal reserve bank of new york indicated reserves could fall to $ 1. 2 trillion. 3 but, the underlying level of reserves wanted by financial markets seemed to be more than we anticipated. in response to the emerging pressures at that time, the fed stopped redemptions and instituted a number of actions over a few days that boosted reserves to at least the level seen in early september of that year. 4 with this experience in hand, we will need to proceed with caution with future securities redemptions. that said, clearly today ’ s balance sheet is elevated, and we can decrease our holdings. should we drain reserves too quickly, we have a new tool to help correct this action should our pace of runoff prove to be too fast again. the standing repurchase agreement facility provides a backstop in cases where demand for liquidity is more than the fed otherwise thought. counterparties can come to the facility and obtain financing for their treasury securities. of course, i do not anticipate reducing reserves to a level where this tool would be used, but it is nice to know that, as we move forward, we have an additional support available to us that we did not have in 2019. to close, i have outlined how i see the economy evolving and mentioned several policy steps in the future that underly that outlook. the tapering of our asset purchases has started and should continue over coming months. then the fed will turn to normalizing other aspects of monetary policy as the economy continues to recover from the severe covid shock we encountered last year. i believe that policy may need to pivot to a faster taper based on incoming data that i will be monitoring. 1 these views are my own and do not represent any position of the board of governors or other federal reserve policymakers. 2 see fernando m. martin ( 2021 ), " how widespread are price increases in the u. s.? " on the economy blog, 4 / 5 bis central bankers'speeches october 19 3 in june 2019, the median of the respondents to the survey of primary dealers indicated a $