The big issue in the US economy has been high inflation for quite some time and continues to be so. We have made pretty good progress. Inflation rates have come down significantly from their peaks a year ago. But inflation is still way too high. Core inflation excluding energy and food is still more than 4%. Especially in services, inflation is sticky. So there is still a lot for us to do. We need to bring inflation down to our 2% target in a sustained and timely manner and we are determined to do that.

Since the beginning of the summer, we have seen some data from the real economy that has been stronger than many forecasters expected. So the US economy is doing quite well. In my own forecast, I expect growth to slow to below trend growth. But so far we haven't really seen that in the numbers, even though a number of forward-looking indicators suggest that the slowdown will continue. What we need now is a slowdown in demand. Demand has to fall to come into line with supply. This is true both in product markets and in the labour market. This will help to further alleviate price pressures.

We have made progress in dampening demand through our monetary policy measures. At the same time, there is progress on the supply side. Supply chain disruptions have improved. We are also seeing an improvement in the supply side of the labour market. More people are returning to the labour market. But we need further progress to bring supply and demand in line. And this then leads to the current crucial questions for monetary policy. Have we made monetary policy restrictive enough? And how long does monetary policy need to be restrictive to bring inflation back to 2%?

The latest indicators suggest that demand is somewhat stronger than expected, that the momentum in the economy is greater than thought. But if the underlying demand is stronger than expected, it needs a more restrictive policy. I can well imagine, from what I see so far, that we might have to go a bit higher, that we might have to raise the policy rate a bit more. But there is still a lot of time before our next decision in September and we will get a lot of data and information by then. It is also a question of weighing two risks. We don't want to tighten monetary policy too much and cause unnecessary pain to the economy. But we also don't want to tighten monetary policy too little. History has taught us that the cost of returning to price stability is even higher if we tighten too little. Given the strength of the labour market and the strength of underlying demand, I believe that currently the costs of insufficient tightening are greater.

The labour market has also come more into balance. The number of job vacancies is decreasing and thus the ratio between job vacancies and unemployment rate is improving without a big increase in unemployment. We must now ensure that this positive development does not falter. My own forecast is for an increase in the unemployment rate. We do not have an accurate estimate for the so-called natural rate of unemployment. So one should not commit oneself to wanting to reach a certain level. But I assume that we see some increase in unemployment.

Wage growth has moderated somewhat as the labour market has moderated. But we also know that current wage growth is higher than what is consistent with 2% inflation given productivity growth. As for expectations: medium and longer-term inflation expectations are fairly well anchored – even if they are at the upper end of the range that would be considered consistent with 2%. Short-term inflation expectations, of course, move more in line with current inflation. Now, for example, petrol prices are unfortunately rising again. We have to be very attentive to that. There is research, including from the Cleveland Fed, that you should not just focus on longer-term expectations. You also have to tackle short-term expectations that are too high and not be too complacent even when long-term inflation expectations are anchored. We need to make sure that our policy is restrictive enough to anchor inflation expectations firmly and bring inflation back down to our 2 percent target.

In the June projections we forecast, and I also forecast, two more rate hikes this year. We did one of them in July. At the September meeting we will have new projections and I cannot say yet what they will be. What I think is clear is that we want to bring inflation down to 2% and time is pressing. The longer inflation stays above 2%, the more likely it is that the risks will materialise. Inflation expectations can destabilise. And the investment decisions of companies and households will be distorted – with economic costs. In addition, the sooner we return to the 2% target, the better we will be able to deal with any new shock.

We still have quite strong demand at the moment. And the same goes for the labour market. I think the cost of undershooting in monetary policy at the moment is still higher than the costs of overshooting. If we end up raising interest rates too much and the economy loses momentum more than necessary, we can lower interest rates. In the other case, if inflation picks up too much, the fight becomes much more difficult. Then we would have to end up raising interest rates even further. That would be much more costly.

Our aim is not to push the economy into recession. We also have the mandate of full employment. We just want our monetary policy to dampen demand sufficiently. We look closely at what is happening in the economy and we are data dependent. But we don't only look at the official data, we also have contacts with companies and banks. And this is interesting: at the end of last year, many of our contacts said they expected a recession at the beginning of this year. Then at the beginning of the year they said the middle of the year. And now many don't believe in a recession at all. This is simply because the economy has performed much better than expected. People have become more optimistic that there will be a soft landing.

Real interest rates determine the decisions of households and companies. And purely mathematically it is the case. But it is also clear that we will certainly not continue to raise interest rates until inflation has already fallen to 2%. Nor will we wait to lower interest rates until inflation is at 2%. We have to be forward looking. But I don't currently expect that we will cut interest rates early next year. Rather, I think we need to keep a sufficiently restrictive stance for quite some time to feel assured that inflation will come back down to 2%.

We see certain prices going up again, like petrol prices. That can lead to higher measured inflation. There are other shocks that could occur. And there are upside risks to our inflation forecasts, in my view. So yes, inflation could go up again. So we have to make sure that our policy is sufficiently restrictive.

I believe that the balance sheet reduction can and should continue in the background even if we stop raising the interest rate or even lower it. We need to systematically reduce our balance sheet and bring it back to an appropriate size that is consistent with sufficient reserves in the financial system.

We have not decided on a particular level at this point except that which is consistent with ample reserves and is lower than the current level. We saw in September 2019 that we probably went a bit too far at that time.

We are still very far from the balance sheet levels we had then and we have a much better apparatus today to monitor these kinds of tensions in the markets. So there is still plenty of room to reduce the balance sheet. And there again, we want to be better prepared for possible future shocks, in case we have to use our balance sheet.

I think we need to look much more at scenarios instead of focusing so much on a base scenario. There is always a lot of uncertainty. There are different possibilities of how the economy can develop, not only in the case of a pandemic. We should consider these alternatives so that we are not just thinking about one path, but are prepared for the fact that things can always develop differently than expected.