Chairman Pro Tempore Powell submitted identical remarks to the U.S. Senate Banking, Housing, and Urban Affairs Committee on March 3, 2022.
Chair Waters, Ranking Member McHenry, and other members of the Committee, I am pleased to present the semi-annual report of the Federal Reserve Monetary policy report.
Before I start, let me talk briefly about Russia’s attack on Ukraine. The conflict is causing enormous hardship for the Ukrainian people. The implications for the US economy are highly uncertain and we will be monitoring the situation closely.
At the Federal Reserve, we are strongly committed to achieving the monetary policy goals given to us by Congress: maximum employment and price stability. We pursue these goals solely on the basis of objective data and analysis, and we are committed to doing so in a clear and transparent manner so that the American people and their representatives in Congress understand our political actions and can hold us accountable. I will review the current economic situation before discussing monetary policy.
Current economic situation and outlook
Economic activity grew at a healthy pace of 5 1/2% last year, reflecting progress in immunization and the reopening of the economy, supportive fiscal and monetary policies, and sound financial health households and businesses. The rapid spread of the Omicron variant caused some slowdown in economic activity earlier this year, but with cases falling sharply since mid-January, the downturn appears to have been brief.
The labor market is extremely tight. Payroll employment increased by 6.7 million in 2021, and job gains were robust in January. The unemployment rate has fallen significantly over the past year and stood at 4.0% in January, reaching the median of Federal Open Market Committee (FOMC) participants’ estimates of its normal level at longer term. Improvements in labor market conditions have been widespread, including for workers at the bottom of the wage scale as well as for African Americans and Hispanics. The demand for labor is very strong and, although the participation rate has increased, the supply of labor remains weak. As a result, employers are struggling to fill vacancies, an unprecedented number of workers are leaving to take new jobs, and wages are rising at their fastest pace in many years.
Inflation rose sharply last year and is now well above our long-term target of 2%. Demand is strong, and bottlenecks and supply constraints limit how quickly production can respond. These supply disruptions have been larger and longer lasting than expected, exacerbated by waves of the virus, and price increases are now spreading to a wider range of goods and services.
We understand that high inflation imposes significant hardship, especially on those least able to afford the higher costs of essentials like food, shelter and transportation. We know that the best thing we can do to support a strong labor market is to promote a long expansion, and that is only possible in an environment of price stability.
The Committee will continue to monitor incoming economic data and adjust the monetary policy stance as appropriate to manage risks that could impede the achievement of its objectives. The Committee’s assessments will take into account a wide range of information, including labor market conditions, inflation pressures and expectations, as well as financial and international developments. We continue to expect inflation to decline over the year as supply constraints ease and demand moderates due to the waning effects of fiscal support and policy removal. monetary accommodation. But we are alert to the risks of possible further upward pressure on inflation expectations and on inflation itself due to a number of factors. We will use our policy tools appropriately to prevent higher inflation from taking hold while promoting a sustainable expansion and a strong labor market.
Our monetary policy has adapted to changing economic conditions, and will continue to do so. We have phased out our net asset purchases. With inflation well above 2% and a strong labor market, we expect it to be appropriate to raise the target range for the fed funds rate when we meet later this month.
The process of removing political accommodation under the current circumstances will involve both increases in the target range for the federal funds rate and a reduction in the size of the Federal Reserve’s balance sheet. As the FOMC noted in January, the federal funds rate is our primary means of adjusting monetary policy stance. The reduction in our balance sheet will begin after the process of increasing interest rates begins and will continue predictably primarily through reinvestment adjustments.
The short-term effects on the US economy of the invasion of Ukraine, the ongoing war, sanctions and future events remain highly uncertain. Conducting an appropriate monetary policy in this environment requires recognizing that the economy is moving in unexpected ways. We will need to be nimble to respond to incoming data and changing insights.
Maintaining public trust is essential to our work. Last month, the Federal Reserve finalized a comprehensive set of new ethics rules to significantly tighten investment restrictions for senior Federal Reserve officials. These new rules will even prevent the appearance of any conflict of interest. They are tough and best in class in government here and around the world.
We understand that our actions affect communities, families and businesses across the country. Everything we do serves our public mission. At the Federal Reserve, we will do everything we can to achieve our goals of maximum employment and price stability.
Thank you. I am happy to answer your questions.