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

basel i suggested for most, certainly all smaller, banks. it is, of course, not an option for lcbos in the united states, given our risk - management objectives. we expect significantly different impacts across the small number of large u. s. entities that will use the advanced irb approach. that is because the intention is not to develop a cookie - cutter, one - sizefits - all set of requirements. rather, each bank is to develop meaningful, empirically based risk classifications across its credit portfolios and sub - portfolios. for each sub - portfolio of loans, each bank will estimate the probability of default, the expected loss given default, exposure at default, and the associated capital to meet selected solvency standards. the supervisors will evaluate the riskclassification and risk - estimation processes at each bank using the advanced irb approach of basel ii, and if the processes are found to be acceptable, those classifications and associated capital needs will be the basis for the minimum regulatory capital requirements. to ensure the credibility of this process, we will expect those same risk classifications and quantifications of default probabilities and loss severities to be used for pricing, reserving, internal capital allocation, and other management purposes. not doing so would raise doubts about using these data at that bank for establishing capital requirements. we want our supervisory standards to be based as closely as possible on the information managers use to run the bank. we expect a wide distribution of minimum regulatory requirements across the individual lcbos, reflecting the differences in their portfolios and risk preferences. we anticipate, however, that the average minimum regulatory requirement will decline under the advanced irb capital structure. it is less clear that the amount of capital held will adjust quite as much, for several reasons. pillar ii of the proposed new accord, enhanced supervision, might call for additional capital at individual institutions, depending on the supervisors'evaluation of controls, management, individual risk structures, and so forth. these variables are difficult to capture in pillar i through formal capital regulations. pillar ii will also address those risk areas - - such as interest rate risk - - for which it is not optimal to develop a single pillar i rule applicable to all banks. pillar iii, as you know, calls for enhanced disclosure of risk exposures to the public. and we expect that market and supervisory discipline will ensure that banking organizations maintain sufficient capital above the regulatory minimums as a prudent sound - banking practice. that has certainly