Fed’s Jefferson: One year too short for higher rates to fully affect demand

“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.”

“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.”

“My expectation is that the slowing economy will soon begin to reduce job growth, with labor supply and labor demand coming into better balance.”
it is hard to tell how much of this tightening was in train already, after continued increases in interest rates, and it is likewise difficult to say how much the stress in midsized banks will ultimately curtail credit in the coming year.”

“So what factors will I consider in the coming weeks as I contemplate the appropriate stance of monetary policy going forward? Over the next few weeks, we will receive a considerable amount of data on economic activity for April and May, including the employment report for May and a report on May CPI inflation.”

“On the one hand, inflation is too high, and we have not yet made sufficient progress on reducing it. On the other hand, GDP has slowed considerably this year, and even though the effect has been muted in the labor market so far, demand clearly has begun to feel the effects of interest rates that are 5 percentage points higher than they were a little over a year ago.”

“History shows that monetary policy works with long and variable lags, and that a year is not a long enough period for demand to feel the full effect of higher interest rates.”