Tightening monetary policy stance

The FOMC has adopted a tightening monetary policy stance. This helps to balance demand and supply 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 tightening policy actions, financial conditions have tightened, partly due to the rise in long-term Treasury yields since the summer. Although statistical models of Treasury yields usually attribute most of the rise to an increase in term premiums, financial market participants have expressed various views on any single explanation, and have no clear conviction about any one explanation. The rise in yields and increased volatility are likely to reflect increased uncertainty about economic prospects and future interest rates.

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

It is expected that inflation will continue to decline to our long-term target of 2%. As I mentioned earlier, the slowdown in inflation should help lower the inflation rate. In addition, based on research from the Federal Reserve Bank of New York, there is 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 forecast is that the overall PCE inflation rate in 2023 will be about 3%, then drop to about 2-1/4% next year, and approach 2% in 2025.

However, the future remains highly uncertain, and our decisions will continue to rely on data. The risks are two-sided, with the possibility of persistent stubborn inflation conflicting with the risks of a weak economy and employment.

In weighing these risks, based on my current knowledge, my assessment is that we may have already reached or are close to peak levels of the federal funds rate target range. According to the model estimates of the long-run neutral rate considering current quarter forecasts, the stance of monetary policy is quite tight; in fact, it is considered to be the tightest in 25 years. I anticipate that in the future, a tightening stance will be appropriate to fully restore balance and bring inflation back to our long-term target of 2% on a sustained basis.