Tight stance on monetary policy

The FOMC has reached a tight monetary policy stance. This helps balance supply and demand and restore inflation to our long-term target of 2%. Earlier this month, the FOMC kept the federal funds rate target range unchanged at 5-1/4 to 5-1/2%.

In addition to our austerity policy actions, financial conditions have been tightened, partly due to the rise in long-term treasury yields since this summer. Although statistical models of treasury yields generally attribute most of the increase to a rise in term premiums, financial market participants have expressed various views on any single explanation and have no clear belief in any one explanation. Higher yields and increased volatility are likely to reflect increased uncertainty about the economic outlook and future interest rates.

Given the tightening of financial and credit conditions, I expect GDP growth to slow to about 1-1/4 percent next year, and the unemployment rate to rise to about 4 to 1/4 percent.

Inflation is expected to continue to fall to our long-term target of 2%. As I mentioned before, slowing inflation should help lower the rate of inflation. Also, based on research by the Federal Reserve Bank of New York, which shows a strong relationship between the global supply chain pressure index and commodity price inflation, I expect to see additional deflationary pressure at this level. My prediction is that overall PCE inflation will be around 3% in 2023, then drop to around 2-1/4 percent next year, then approach 2 percent in 2025.

Still, the future remains highly uncertain, and our decisions will continue to rely on data. The risk goes both ways, and the possibility of continued stubborn inflation is counterbalanced by the risk of a weak economy and employment.

When weighing these risks, my assessment is that we may have reached or are close to the peak level of the federal funds rate target range, based on what I know now. According to model estimates that take into account the long-term neutral interest rate forecast for the current quarter, the monetary policy position is quite tight; in fact, according to estimates, it is considered the tightest in 25 years. I expect an austerity stance to be maintained appropriately in the future to fully restore balance and return inflation to our long-term target of 2 per cent on a sustained basis.