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Remarks on the U.S. Economy and Monetary Policy
Kathleen O’Neill Paese
Interim President and CEO, Federal Reserve Bank of St. Louis
Association for Corporate Growth Kentucky, CFA Society Louisville and Financial Executives
International Louisville
Jeffersonville, Ind.
Nov. 9, 2023
Good afternoon, everyone. I am very happy to be here with you today, and I look forward to
sharing information on the economy and the path of monetary policy. As interim president of the
Federal Reserve Bank of St. Louis, I represent the Eighth Federal Reserve District at meetings of the
Federal Open Market Committee, or FOMC, where I report on economic conditions in the District,
comment on the key data and analysis about the national economy and express my views on
monetary policy. The Eighth District encompasses all or parts of seven states, including western
Kentucky and southern Indiana, and we have a branch office in Louisville in the capable hands of
our branch executive, Seema Sheth. In a few minutes, Seema will be pitching some hard questions
to me, but first I will level set with a few remarks about the U.S. economy and monetary policy. At
the outset, let me make clear that I’m expressing my personal views, which are not necessarily
those of any other FOMC participant.
Monetary Policy Goals
The Federal Reserve has a mandate from Congress to pursue monetary policy directed toward
achieving maximum sustainable employment and price stability. This is often referred to as the
Fed’s “dual mandate.” The FOMC is the Fed’s monetary policymaking committee. At its meetings,
the Committee reviews current economic conditions and forecasts, discusses policy options, and
decides on a course of action to achieve the dual mandate goals. Typically, the FOMC sets a target
range for the federal funds rate and then adjusts the interest rate paid on bank reserve balances
so that the fed funds rate stays within the target range. At times, the Fed has used other tools,
such as purchases of Treasury and mortgage-backed securities, but the federal funds rate is the
main tool.


The FOMC’s statement on longer-run goals and monetary policy strategy is posted on the Federal
Reserve Board of Governors website. 1 That statement lays out how the Committee will respond to
employment shortfalls and deviations from price stability. Further, it explains that the Committee
will take a balanced approach whenever the employment and price stability goals are seemingly in
conflict. Notably, the statement does not specify a numerical target for the employment mandate
because employment is influenced by many things besides monetary policy. However, the
statement does specify a numerical target for inflation, because over the long term inflation is
determined primarily by monetary policy. For several years, the FOMC has judged that 2 percent
average inflation, as measured by the price index for personal consumption expenditures, or PCE,
is consistent with the price stability goal. Two percent is a widely accepted international standard
for inflation. It is based on experience indicating that the economy performs well with a 2 percent
average inflation rate while allowing more room for the Fed to lower interest rates in response to
employment shortfalls that may occur.
Responding to the COVID-19 Shock
The U.S. economy, and consequently the Fed’s monetary policy, were put to the test by the
COVID-19 pandemic shock and its effects on the global economy. When the pandemic began to
sweep across the United States in March 2020, the FOMC cut its target for the federal funds rate
to zero and began to make substantial purchases of Treasury and mortgage-backed securities. 2
These actions were taken to prevent a potential financial crisis and to insulate the economy as
much as possible from the economic fallout of the shock. That “pedal to the floor” monetary policy
was appropriate at the time and effective at helping to limit the economic fallout of the pandemic
and in encouraging economic recovery. However, as the economy recovered, employment grew
rapidly and inflation began to rise sharply. Monetary policy then had to adjust. The Fed did that
first by easing up on the gas pedal and later by applying some brake pressure. The Fed did not
slam the brakes on the economy, but did expeditiously firm policy to bring inflation under control
with as little negative impact on the real side of the economy as possible.
Monetary policy today remains modestly restrictive but not overly tight. At its most recent
meeting on November 1, the FOMC reaffirmed its commitment to achieving 2 percent inflation.
Although the Committee did not increase its target for the federal funds rate at that meeting, it
See the FOMC’s “Statement on Longer-Run Goals and Monetary Policy Strategy,” adopted effective Jan. 24, 2012,
and reaffirmed effective Jan. 31, 2023.
The Federal Reserve also established several temporary lending facilities to provide liquidity to specific markets and
types of institutions. A summary of those facilities is available on the Board of Governors website (Funding, Credit,
Liquidity, and Loan Facilities).


left the door open for further policy firming if necessary for achieving 2 percent inflation. At the
meeting, I expressed support for both aspects of the decision—that is, for maintaining the target
for the federal funds rate and for retaining the option of further firming if necessary for restoring
price stability. Let me spend a few minutes now reviewing the events and actions of the past three
years and then explain my support for the FOMC’s recent decision and commitment to achieving
price stability.
As Figure 1 illustrates, the unemployment rate increased sharply during the pandemic recession.
From 3.5 percent in February 2020, the rate soared to 14.7 percent two months later. According to
the Bureau of Labor Statistics, the true unemployment rate was even higher, as many people who
should have been counted as unemployed were misclassified. At the time, economists debated
how quickly the economy would recover. It turned out to be very quickly, as the figure shows.
Employment growth was robust after the initial shutdown orders were lifted and people began to
return to more in-person activities. Of course, the federal government provided fiscal policy
support; for example, with the CARES Act and infrastructure spending bill. The Fed also provided a
lot of policy support. By December 2021, the unemployment rate was back below 4 percent, and
by July 2022, it was all the way down to 3.5 percent. Currently, the rate stands at 3.9 percent.
The behavior of the inflation rate was also dramatic, as Figure 2 shows. From just under 2 percent
at the start of the pandemic, the headline PCE inflation rate dipped to 0.4 percent in April 2020. At
the time, there was a lot of concern that had the Fed not responded aggressively, the inflation rate
might have continued to decline and gone negative—a deflation scenario. However, just as the
unemployment rate came down, the inflation rate began to rise as the economy recovered. The
headline inflation rate ultimately reached a peak of 7.1 percent in June 2022. The so-called core
inflation rate, which excludes food and energy prices, behaved similarly but somewhat less
dramatically, peaking at 5.6 percent in February 2022.
As inflation rose well above 2 percent, economists debated why it had risen so much and whether
it would stay high or rapidly fall back to 2 percent or below. Many blamed disruptions in supply
chains associated with pandemic measures and changes in consumer behavior. The thinking was
that inflation would decline quickly once supply caught up with demand. Others viewed inflation
as resulting mainly from expansionary monetary and fiscal policy. The debate is yet to be resolved,
and it’s likely that both supply disruptions and strong demand for goods and services contributed
to the inflation.


In response to higher inflation, the Fed began to ease off the gas pedal and recalibrate policy in
November 2021, when it announced a slowing in the pace of its asset purchases. Then, in March
2022, the FOMC initiated a series of hikes in its federal funds rate target—11 increases so far—
that raised the funds rate target to its current range of 5.25 percent to 5.50 percent. Figure 3 plots
the FOMC’s target rate increases across the seven tightening cycles since 1983. As shown by the
green line, the tightening of 2022-23 is the quickest and steepest increase in the fed funds target
in over 40 years. Shortly after the first hike, the FOMC began to reduce the size of its balance sheet
by limiting the replacement of securities in its portfolio as they matured. Figure 4 illustrates the
sharp increase in the Fed’s holdings of Treasury and mortgage-backed securities starting in March
2020. The balance sheet size peaked in April 2022. Except for a brief increase in the spring when
the Fed increased loans to depository institutions following the collapses of Silicon Valley Bank and
Signature Bank, the balance sheet has continued to shrink.
Current Conditions and a Look Ahead
Inflation fell significantly in the first nine months of 2023, especially during the second quarter. As
of September—the most recent month for which we have PCE inflation data—the inflation rate
stood at 3.4 percent. That is still well above the Fed’s 2 percent target, but a substantial
improvement from the average inflation rate in 2022. Economists expect that inflation will
continue to fall. However, recently, inflation has been moving more sideways than down.
Measured from a year ago, headline PCE inflation was stuck at 3.4 percent from July to September,
while the core measure drifted down from 4.3 percent in July to 3.7 percent in September.
While inflation was moving sideways in the third quarter, economic activity was surging ahead.
Real gross domestic product (GDP) blew away economists’ earlier forecasts of a slowdown with a
4.9 percent annualized growth rate—more than double the historical average. Similarly, payrolls
rose sharply, averaging job gains of 233,000 per month in the quarter, capped by 297,000 jobs
added in September. At the September FOMC meeting, I, along with the other participants,
submitted projections for how the economy would continue to evolve over the rest of the year
and for the next two years. At that time, I thought that it would likely be appropriate to raise the
policy rate another time before the end of the year. The third-quarter data certainly seemed to
justify that projection.
Economic data are inherently backward looking, however. For example, when the FOMC met last
week, we did not know that employment growth had slowed, and that “only” 150,000 jobs had
been added in October, or that the unemployment rate had risen to 3.9 percent. Some data


releases provide insights about the future. But, for the most part, reports only tell us where we’ve
been, not where we’re headed. We now know what happened in the third quarter and before, but
we have little data to tell us how economic conditions will evolve over the fourth quarter or next
year. To get a sense of trends, we talk to many people from all types of businesses and walks of
life. We have many contacts here in the Louisville area and in other parts of the Eighth District who
share information that helps us discern where inflation, the labor market and economic activity
might be headed.
Shown in Figure 5, as of September there were approximately 1.5 jobs available for every
unemployed person. Although substantially lower than the peak of 2 jobs per unemployed person
in 2022, the number of jobs per unemployed person remained well above its historical level and
indicative of a tight labor market. Recent reports from our contacts suggest that labor supply and
demand are continuing to become better aligned. For example, firms are telling us that it’s easier
to fill open positions than it was a year ago, and that wages are not rising as fast. We’re also
hearing from contacts that inflation pressures may be easing. That information helped convince
me to support the FOMC’s decision last week to hold the policy rate at its current level while
leaving the option of further tightening on the table in case it is needed to finish the job of
restoring price stability.
A second reason I supported the FOMC’s recent decision is the tightening of financial and credit
conditions that has occurred over the past two or three months. That tightening has been
reflected in higher yields on long-term Treasury and corporate securities, as well as mortgage rates
and other interest rates paid by households and firms. Reports from throughout the Eighth District
indicate that higher interest rates are beginning to constrain economic activity, which should
dampen demand and put further downward pressure on inflation. In addition, the Fed’s quarterly
survey of senior bank loan officers found that more banks tightened lending standards in the third
quarter than eased them. Such tightening should also contribute to easing of inflation pressures.
Now it remains to be seen whether the tightening of financial and credit conditions is sufficient
and sufficiently persistent to bring inflation down to target. However, the tightening that had
occurred by the end of October, coupled with the reports I was receiving from District contacts,
convinced me to support the FOMC’s decision to leave unchanged the fed funds rate target for
It will be important to watch closely how all facets of financial conditions evolve in the coming
weeks as the FOMC weighs its policy options at its next meetings. The 10-year Treasury security
yield dropped about 30 basis points late last week, which some commentators attributed to


reduced prospects of further rate hikes by the Fed. I will continue to monitor the 10-year yield and
other measures of financial and credit conditions and consider their implications for monetary
policy. As Fed Chair Jerome Powell stressed at his post-meeting press conference last week, tighter
financial conditions will need to persist for a while to bring inflation back to 2 percent. It appears
clear that the road back to the 2 percent target will be bumpy, but I still believe that a soft landing
for the economy is possible.
So, what comes next? Importantly, in its policy statement on November 1, the FOMC
communicated that “additional policy firming … may be appropriate to return inflation to 2
percent over time.” I expressed support for this statement because I believe that until inflation is
clearly and convincingly headed to 2 percent, it would be unwise to suggest that further rate hikes
are off the table. There is considerable economic uncertainty at the present time. There are
reasons inflation could surprise to the upside. Labor markets remain tight and overall household
liquid asset holdings remain high. A high level of household savings accumulated during the
pandemic remains unspent. This suggests to me that consumer spending might continue to exceed
expectations and pose upside risk to inflation. On the other hand, there are risks that could cause
the economy to slow more quickly than we now expect. For example, a more abrupt or significant
tightening of financial conditions than we have seen so far could dampen demand excessively. A
government shutdown or an expanded war in the Middle East or other geopolitical shocks could
shake business and consumer confidence and similarly depress spending, though they could
possibly also increase inflation if they are associated with an increase in oil prices.
With policy currently exerting modest downward pressure on inflation, and given the balance of
risks, we can afford to await further data before concluding that additional policy tightening is
appropriate. However, if progress toward achieving 2 percent inflation stalls, I believe that the
Committee should act promptly to ensure that high inflation does not become entrenched. If the
public comes to believe that high inflation will persist indefinitely, the resulting loss of credibility
would make restoring price stability harder to achieve and entail greater economic costs. I’m
optimistic that we can and will achieve price stability, but we’re not quite there yet and we should
not declare victory and release the monetary brake prematurely. Price stability is critical for
achieving maximum sustainable employment and a strong economy. Therefore, we must remain
vigilant until inflation is clearly and convincingly well on its way back to target.
Thank you.


Figure 1: Unemployment

Source: Bureau of Labor Statistics. The shaded area denotes U.S. recession. Last observation:
October 2023.

Figure 2: Inflation

Source: Bureau of Economic Analysis. The shaded area denotes U.S. recession. Last observation:
September 2023.


Figure 3: Comparing Tightening Cycles

Sources: Board of Governors of the Federal Reserve System and author’s calculations. Last
observation: Nov. 6, 2023.

Figure 4: The Fed’s Balance Sheet

Sources: Board of Governors of the Federal Reserve System and author’s calculations. Last
observation: October 2023.


Figure 5: Labor Market Tightness

Sources: Bureau of Labor Statistics and author’s calculations. The shaded areas denote U.S.
recessions. Last observation: September 2023.