Key takeaways of The Speech:The U.S. Economic Outlook and Considerations for Monetary Policy Governor by Philip N. Jefferson

 Economic Activity

• Despite uncertainties from banking-sector stress, geopolitical instability, and the aftermath of the pandemic, the economy is expected to grow in the second quarter.
• The pace of growth will be slower than in the first quarter due to weakening spending and declining consumer sentiment.
• Slow spending and GDP growth are projected throughout 2023, driven by tight financial conditions, low consumer sentiment, and reduced household savings.
• Downside risks include the potential impact of bank lending restraint and uncertainty on economic activity.

Labor Market

• Employment continues to increase, and the current labor market is one of the strongest in decades.
• Job creation has been resilient, although slightly slower than in the second half of 2022.
• The tight labor market has led to higher wages and compensation for workers, positively affecting their income.
• Labor demand has eased somewhat, resulting in a modest decline in average hourly earnings growth.

Inflation

• Inflation has decreased since last summer but remains high.
• Improvement is seen in energy and food prices, but core inflation (excluding volatile items) remains a challenge.
• Core goods inflation has stabilized, housing services inflation remains high, and nonhousing services inflation shows no significant decline yet.

Recent Stress in the Banking Sector

• The banking system is considered sound and resilient, but recent stress events may lead to further tightening of credit standards.
• Some banks have already tightened lending conditions, and the impact on credit and economic activity is uncertain.
• Ongoing monitoring is necessary to assess the potential effects of stress events.

The Insurance Industry Resiliency

• The insurance industry has performed well despite recent stresses.
• Property and casualty insurance companies faced reduced profitability due to natural catastrophes and inflation.
• Life insurers benefited from higher interest rates but face risks such as early withdrawals by policyholders.
• Capitalization in the industry remains strong, but the use of reinsurance requires monitoring.

Considerations for Monetary Policy

• Monetary policy will consider economic data for April and May, focusing on inflation and economic activity.
• The policy should be forward-looking, anchored around a 2 percent inflation target, and responsive to new data.
• Inflation remains high, while GDP growth has slowed, and the effects of higher interest rates on demand are yet to fully materialize.
• The uncertainty surrounding tighter lending standards will also be taken into account.

Source: https://www.federalreserve.gov/newsevents/speech/jefferson20230518a.htm