St. Louis Fed President: The U.S. economic outlook is robust, and inflation expectations remain a key variable

According to the Zhitong Finance APP, James Bullard, President of the Federal Reserve Bank of St. Louis, expressed an optimistic outlook on the overall prospects of the U.S. economy this year, but is still closely monitoring consumer and business inflation expectations to assess the necessity of future inflation trends and monetary policy adjustments.

In his speech at the National Association for Business Economics (NABE) Economic Policy Conference in Washington, Bullard noted that his baseline forecast is for inflation to continue moving towards the Federal Reserve's 2% target, while the labor market remains close to full employment. However, achieving this outlook requires monetary policy to remain moderately tight until inflation shows substantial progress. Additionally, he emphasized that stabilizing inflation expectations is crucial to prevent self-reinforcing expectations of price increases.

"The economic growth outlook remains good, the labor market is healthy, and the financial environment is supportive," Bullard stated. However, he also acknowledged that some recent economic data has been weaker than expected, indicating that economic growth still faces certain risks. At the same time, since inflation remains above the 2% target, "more monetary policy efforts" are needed to ensure price stability.

Bullard is particularly focused on consumer inflation expectations, as they have significant implications for Federal Reserve policy decisions. The final results of the University of Michigan's February inflation expectations survey showed that consumers expect an inflation rate of 4.3% over the next year, up from 3.3% in January. Long-term inflation expectations also rose from 3.2% in January to 3.5% in February, marking the largest monthly increase since May 2021.

He emphasized that maintaining stable medium- and long-term inflation expectations is essential, as this will allow the Federal Reserve to retain maximum flexibility in responding to economic changes, especially when facing the difficult trade-off between employment and inflation. If the labor market weakens while inflation remains stable or continues to decline towards the 2% target, the Federal Reserve may consider lowering interest rates, provided that inflation expectations remain stable at levels consistent with the 2% target.

Bullard reflected on history, noting that the costs of inflation management in the 1970s were far greater than those since 2022, largely due to the loss of control over inflation expectations at that time. "For this reason, if there are signs of inflation expectations becoming unanchored, I will pay special attention to this issue and prioritize ensuring that inflation continues to converge towards the FOMC's 2% target in an environment of full employment."

Despite Bullard's cautiously optimistic view on economic growth, the latest economic forecast data has raised warning signals. The Atlanta Fed's GDPNow model, updated on March 3, predicts that U.S. GDP will shrink by 2.8% in the first quarter, worsening from the -1.5% forecast on February 28, while the previous model's predictions had consistently maintained a growth range of 2%-4%, in line with most other forecasting models.

The changes in this model indicate that U.S. economic growth is rapidly slowing. The GDPNow forecast is based purely on mathematical calculations and does not include any subjective judgments. The Atlanta Fed's official website emphasizes that this forecast does not represent the official view of the Federal Reserve.

Foreign media analysis points out that although the GDPNow model tends to fluctuate significantly in the early part of the quarter and is often more valuable at the end of the quarter, the latest downward forecast aligns with other indicators reflecting a slowdown in economic growth This data further exacerbates market concerns about the economic outlook. If GDP continues to shrink while inflation remains high, the Federal Reserve may face more complex policy choices.

Moussailem also discussed the potential impact of tariff increases and changes in immigration policy on inflation. He pointed out that from a monetary policy perspective, if the price increases caused by these factors are temporary and have limited impact, the Federal Reserve could choose to "ignore" this short-term shock. However, if the inflation rate remains persistently above target or long-term inflation expectations rise, the Federal Reserve may need to adopt different policy responses.

"In this case, a tighter monetary policy may be appropriate," Moussailem added. He further noted that if the labor market deteriorates while inflation remains elevated, the Federal Reserve's policy choices will become more difficult. "Current inflation is already above 2%, and the labor market is at full employment, so the risks of policy adjustments are higher than when inflation is at or below target levels," he said.

Although Moussailem believes the U.S. economy remains robust, the risks of inflation have not been completely eliminated, especially as changes in inflation expectations could influence the direction of future monetary policy. However, the latest GDPNow forecast from the Atlanta Fed has begun to warn of the possibility of an economic recession, which means the Federal Reserve may need to strike a more challenging balance between inflation and growth.

Federal Reserve officials may need to weigh the possibility of interest rate cuts in the coming months while ensuring that inflation expectations do not rise further. The market is closely monitoring upcoming economic data to assess whether the Federal Reserve will make policy adjustments in the future, and this process may be more challenging than expected