00:00This year, the economy has faced new challenges.
00:05Significantly higher tariffs across our trading partners are remaking the global trading system.
00:10Tighter immigration policy has led to an abrupt slowdown in labor force growth.
00:16Over the longer run, changes in tax, spending, and regulatory policies may also have important
00:21implications for economic growth and productivity.
00:26There is significant uncertainty about where all of these policies will eventually settle
00:30and what their lasting effects on the economy will be.
00:35Changes in trade and immigration policies are affecting both demand and supply.
00:40In this environment, distinguishing cyclical developments from trend or structural developments
00:45is difficult.
00:47So, putting the pieces together, what are the implications for monetary policy?
00:54In the near term, risks to inflation are tilted to the upside, and risks to employment to
00:59the downside, a challenging situation.
01:03When our goals are in tension like this, our framework calls for us to balance both sides
01:07of our dual mandate.
01:09Our policy rate is now 100 basis points closer to neutral than it was a year ago.
01:15And the stability of the unemployment rate and other labor market measures allows us to proceed
01:20carefully as we consider changes to our policy stance.
01:25Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance
01:30of risks may warrant adjusting our policy stance.
01:35Overall, while the labor market appears to be in balance, it is a curious kind of balance
01:42that results from a marked slowing in both the supply of and demand for workers.
01:48This unusual situation suggests that downside risks to employment are rising.
01:53And if those risks materialize, they can do so quickly in the form of sharply higher layoffs
01:58and rising unemployment.
02:01At the same time, GDP growth has slowed notably in the first half of this year to a pace of
02:061.2%, roughly half the 2.5% pace in 2024.
02:13The declining growth has largely reflected a slowdown in consumer spending.
02:18As with the labor market, some of the slowing in GDP likely reflects slower growth of supply
02:23or potential output.
02:27Turning to inflation, higher tariffs have begun to push up prices in some categories of goods.
02:33Estimates based on the latest available data indicate that total PCE prices rose 2.6% over
02:39the 12 months ending in July.
02:43The effects of tariffs on consumer prices are now clearly visible.
02:47We expect those effects to accumulate over coming months with high uncertainty about both
02:52timing and amounts.
02:55The question that matters for monetary policy is whether these price increases are likely
02:59to materially raise the risk of an ongoing inflation problem.
03:05It's also possible, however, that the upward pressure on prices from tariffs could spur a
03:10more lasting inflation dynamic.
03:12And that is a risk to be assessed and managed.
03:16One possibility is that workers who see their real incomes decline because of higher prices,
03:21demand and get higher wages from employers, setting off adverse wage price dynamics.
03:28Given that the labor market is not particularly tight and faces increasing downside risks, that
03:34outcome does not seem likely.
03:37Thank you very much.
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