Waller, One Transitory Shock After Another

Home News & Events Speeches Speech PDF <div class="js-disabled text-center"> <span class='icon icon-alert icon--jsAlert'></span> <span><strong>Please enable JavaScript if it is disabled in your browser or access the information through the links provided below.</strong> </span> </div> April 17, 2026 One Transitory Shock After Another Governor Christopher J. Waller At the David Kaserman Memorial Lecture, Department of Economics, Auburn University, Auburn, Alabama Share Thank you, Joe, and thank you for the opportunity to speak to you today.1 My subject, as it often is, is the outlook for the U.S. economy and the implications for monetary policy. My last outlook speech was at the end of February, which, I have to say, now feels like it was a year ago.2 Before I get to everything that has happened since, let me remind you of how things looked back then. The economic data indicated that, in the absence of the temporary effects of tariffs, inflation was running a bit above the Federal Open Market Committee's (FOMC) 2 percent goal. The larger question was whether the labor market was substantially weakening, with the unemployment rate fairly steady but little job creation and other signs of a softening labor demand relative to supply. At that point, I was looking for a clearer picture of whether the risks to the FOMC's maximum employment goal called for a cut in our policy rate or if we should hold that rate steady to support continued progress toward 2 percent inflation. After that speech and before the FOMC's March meeting, two critical things occurred. The first was the start of the conflict with Iran, which quickly disrupted energy production and transportation in the Middle East and sent global energy prices soaring. While central bankers rightly tend to discount the effects of temporary oil supply shocks, it was apparent that a prolonged disruption in that region could have a lasting effect on inflation and U.S. economic growth, and that was a consideration going into the FOMC's March 17 and 18 meeting. The second development is what we have come to more fully recognize about the supply side of the labor market. Over the course of last year, we got the details of how net immigration, which was 2.3 million in 2024, fell to a minimal level in 2025 and is continuing at a very low level in 2026. This pattern has lowered population growth and, hence, the growth of the labor force. This change in immigration, combined with the continued aging of the population, means that very little or no net job creation is necessary to absorb new workers into employment.3 This development is unprecedented in recent history, and I believe it is a significant factor in understanding the economic outlook and what that means for monetary policy. Before I say more about these two important considerations for the outlook, I will start with how the economy looked ahead of the outbreak of the conflict in the Middle East and then discuss how I think things will evolve if the cease-fire in place today holds and if there is progress toward reopening the Strait of Hormuz. But since that outcome is not assured, I will also discuss another scenario, where supply disruptions continue for an extended time. Beyond the length of these disruptions, with this economic shock coming on the heels of the boost to prices from import tariffs, I believe there is the possibility that this series of price shocks may lead to a more lasting increase in inflation, as we saw with the series of shocks during the pandemic. So far, there is limited data for March, which is when the conflict began, but what we do have indicates that real gross domestic product (GDP) was growing modestly in the first quarter of 2026, in the absence of a temporary boost from the rebound in activity after the end of the government shutdown in late 2025. A continued surge of business investment in the first two months of the year seems to have mostly offset the apparent softness in consumer spending to keep the economy growing. Data center construction and related spending on high-tech equipment are very strong, and these both have spillovers to investment in other capital goods. Meanwhile, surveys of purchasing managers for both manufacturing and nonmanufacturing businesses indicate that their companies expanded sales in March. And the consensus of respondents to the Blue Chip survey implies that real GDP grew at a 2.4 percent annual rate in the first quarter. Let's turn to the labor market. Any assessment has to take on board the supply-side considerations I mentioned earlier. One that has been a factor for some time is the aging of the population. Members of the "baby boom" generation associated with the surge in births in the 20 years after World War II began to reach retirement age around the year 2008. Since then, retirements have outpaced new entrants to the labor force, pushing down the labor force participation rate. The other big factor has been the decline in net immigration I mentioned, which was around 400,000 in 2025, much lower than in previous years, and is expected by some to be around zero in 2026. Together, these two forces are holding labor force growth at about zero. An important implication is a reduction in the number of new jobs needed to reflect a healthy labor market and keep the unemployment rate steady. In previous years, this number ranged between 50,000 and 150,000 per month, but with no growth in the labor force, it is now likely close to zero. In fact, over the second half of last year employers shed 50,000 jobs, an average of 10,000 per month, and the unemployment rate moved largely sideways. Low payroll growth means that there is a much greater likelihood of employment shrinking in any month, something that was a fairly unusual occurrence in the past during an economic expansion. And, in fact, payroll gains have alternated between positive and negative numbers for the past 10 months. Most recently, after closing the year with a loss of 17,000 jobs, payrolls grew 160,000 in January—the largest increase in more than a year—promptly fell 133,000 in February and bounced back to grow 178,000 last month. This head-snapping volatility has only made it harder to assess the state of the labor market and where things stand relative to the FOMC's maximum-employment goal. I am going to have to get used to payroll numbers that are lower than I am accustomed to seeing in a growing economy as well as the possibility that even several months of negative payrolls may not be the warning sign of a recession that it often has been in the past. Nevertheless, I want to explain why I continue to see weakness in the labor market that leaves it vulnerable, starting with data showing low numbers of both hires and people losing their jobs. This phenomenon is documented in the Job Openings and Labor Turnover Survey data and is consistent with what business contacts have been telling me, as well as stories collected in the Federal Reserve's Beige Book survey of business conditions. On the one hand, employers are hesitant to shed workers, even in the face of softening demand, perhaps because of the difficulties they faced in finding workers in the tight labor market after the pandemic. On the other hand, employers are very hesitant to hire workers because of the considerable uncertainty over the outlook. My sense is that employers are walking a tightrope between their earlier challenges in finding qualified workers and where they think the economy is going, leaving them vulnerable to some economic shock that could tip them over and lead to significant job reductions. While the unemployment rate is fairly steady and close to FOMC participants' views of its longer-term, or natural, rate, data on job finding, availability, and openings are continuing to edge lower. The low job-finding rate means that workers are unemployed for longer, and behind the fairly stable count of unemployed people, a growing share are out of work for an extended time. Before I turn to how the conflict with Iran is affecting inflation, let's consider where it was through February. According to the FOMC's preferred inflation measure, personal consumption expenditures (PCE) prices were up 2.8 percent in February from a year before. Core prices, excluding volatile food and energy, are a better guide to ongoing inflation, and they were up 3 percent. Neither measure is close to the FOMC's 2 percent goal, both are just about where they were a year before, and it might seem we hadn't made progress. But this view doesn't consider the role of import tariffs that were first introduced a year ago, which have boosted prices for those goods. Being here at Auburn University and as a former professor, I don't want to miss an opportunity to impart a lesson on price levels versus inflation. When tariffs are passed along in consumer prices, they raise prices and push up inflation, which is the rate at which prices are rising. Once that tariff effect is in place, prices are at a new, higher level; it no longer raises inflation; and, over time, we see the effect on inflation fade. While tariffs boosted inflation considerably in 2025 and into this year, using research by the Federal Reserve staff on their estimated effect and taking that out of the published inflation numbers, we find that underlying inflation—by which I mean excluding tariff effects—is running close to 2 percent.4 So, through the end of February, I found that underlying inflation was making progress toward our goal and that it wasn't a significant concern for monetary policy. I was more concerned about the labor market, which showed signs of weakness and I felt was more vulnerable than it might otherwise be due to the low rates of hiring and layoffs. That was the picture on February 28, when the conflict with Iran began. Then we saw higher energy prices quickly feed through to headline inflation. Prices for gasoline have risen by more than one-third since the con