Thank you, John, and thank you for the invitation to speak to you today.
My purpose this evening is to explain why I believe that the Federal Open Market Committee (FOMC) should reduce our policy rate by 25 basis points at our next meeting. I used to tell my junior research colleagues that presentations are not murder mysteries-just tell the audience up front “who did it” by telling them the main point. So let me follow my own advice and state up front the reasons I believe we should cut the policy rate at our meeting in two weeks.
First, tariffs are one-off increases in the price level and do not cause inflation beyond a temporary surge. Standard central banking practice is to “look through” such price-level effects as long as inflation expectations are anchored, which they are.
Second, a host of data argues that monetary policy should be close to neutral, not restrictive. Real gross domestic product (GDP) growth was likely around 1 percent in the first half of this year and is expected to remain soft for the rest of 2025, much lower than the median of FOMC participants’ estimates of longer-run GDP growth. Meanwhile, the unemployment rate is 4.1 percent, near the Committee’s longer-run estimate, and headline inflation is close to our target at just slightly above 2 percent if we put aside tariff effects that I believe will be temporary. Taken together, the data imply the policy rate should be around neutral, which the median of FOMC participants estimates is 3 percent, and not where we are-1.25 to 1.50 percentage points above 3 percent.
