Federal Reserve reports on monetary policy to Congress

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The Federal Reserve Board (FRB) has submitted the first of its two semi-annual written reports to Congress for 2022. Called the “Monetary Policy Report,” it discusses “the conduct of monetary policy and economic developments and the outlook for the economy.” ‘Future’ and is prepared for the U.S. Senate Committee on Banking, Housing, and Urban Affairs and the U.S. House Committee on Financial Services.

Fed Chairman Jerome Powell will testify before the House committee on March 2, 2022 and before the Senate committee on March 3, 2022. This report will serve as the basis for his prepared remarks during these sessions. Below, we present some highlights from the report, which was submitted to Congress on February 25, 2022.

Key points to remember

  • The Federal Reserve has submitted the first of its two semi-annual reports to Congress for 2022.
  • This provides insight into Fed Chairman Jerome Powell’s testimony before Congress on March 2-3, 2022.
  • With high inflation and a strong labor market, the Fed expects to raise the fed funds rate and shrink its balance sheet.

Summary

“U.S. economic activity made impressive further gains in the second half of last year, but inflation hit its highest level since the early 1980s. The labor market has tightened considerably in an environment of strong demand for workers and limited supply, with the unemployment rate hitting the midpoint of Federal Open Market Committee (FOMC) participants’ estimates of its normal longer-term level and nominal wages rising at their fastest pace in decades.”

“[I]Inflation has increased significantly over the past year, well exceeding the FOMC’s long-term target of 2% and broadening to a wider range of products. In early 2022, the rapid spread of the Omicron variant appeared to be causing a slowdown in some sectors of the economy, but with Omicron cases declining sharply since mid-January, the downturn should be brief.”

“[N]and asset purchases will end in early March. With inflation well above the FOMC’s long-term target and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.”

Recent economic and financial developments

Economic activity and labor market

“The unemployment rate has fallen nearly 2 percentage points since June and, at 4% in January, hit the median of FOMC participants’ estimates of its longer-term normal level. In addition, the decline in unemployment was widespread across all demographic groups. , participation in the labor market only increased last year and remains limited. The labor shortage, combined with a continued increase in labor demand, has led to strong nominal wage growth, especially for low-wage workers. activity.”

Inflation

“Upward pressure on price inflation for goods experiencing both supply chain bottlenecks and strong demand, such as motor vehicles and furniture, has persisted, and the High inflation spread to a wider range of items.Inflation in services also accelerated further, reflecting strong wage growth in some service sectors and a significant increase in housing rents… Measures of longer-term inflation expectations have only increased slightly; they remain within the range observed in the decade before the pandemic and therefore appear broadly in line with the FOMC forecast longer-term inflation target of 2 %.

Financial conditions

“Consumer credit financing conditions remain broadly accommodative, except for borrowers with low credit ratings. Mortgage rates for households remain low despite recent increases. Bank lending standards have eased in most categories of loans and bank credit expanded. Overall, financing conditions were accommodating for businesses and households.”

Financial stability

“While some financial vulnerabilities remain elevated, large banks at the heart of the financial system continue to show resilience… Non-financial sector leverage has largely declined and credit growth in the household sector has been pulled almost exclusively through residential mortgages and auto lending to prime borrowers Financial sector leverage vulnerabilities are within historical ranges… Domestic banks continue to maintain sizable levels of liquid assets high-quality… The Federal Reserve continues to assess the potential systemic risks posed by hedging funds and digital assets.”

International developments

Foreign GDP continued to recover rapidly, overall, despite successive waves of the pandemic… In particular, inflation rose in many economies in the second half of last year, boosted significantly by rising energy and other commodity prices as well as supply chain constraints . .. Foreign financial conditions have tightened slightly but are generally contained… Recent geopolitical tensions related to the Russian-Ukrainian situation are a source of uncertainty in global financial and commodity markets.

Monetary Policy

Interest rate policy

“With inflation well above that of the Comité [i.e., the FOMC’s] long-term target of 2% and a strong labor market, the Committee expects that it will soon be appropriate to raise the target range for the federal funds rate. »

Balance sheet policy

At its January meeting, the FOMC decided to continue to scale back its net asset purchases at this accelerated pace, which will bring them to an end in early March… A number of meeting participants said conditions would justify likely to start reducing the size of the balance sheet later this year.”

“In assessing the appropriate monetary policy stance, the Committee is firmly committed to its objectives of price stability and maximum employment and stands ready to use its tools to prevent rising inflation from taking root while fostering sustainable expansion and a strong labor market.”

Special topics

Low labor supply

“Labour supply has been slow to rebound, although labor demand has been remarkably strong. The labor force participation rate remains well below estimates of its long-term trend, primarily reflecting a wave of retirements among the elderly and an increase in the number of people in the labor force and with caring responsibilities”.

Wage and employment growth among jobs and workers

“Wage and employment gains were widespread across occupations and industries last year, with the lowest-paying jobs recording the largest gains in both median wages and employment… median salaries also increased between racial and ethnic groups, leaving differences in salary levels between groups little changed from 2019.”

Inflation widening

“Higher PCE [Personal Consumption Expenditures] price inflation has widened over the course of 2021… The widening was evident for both goods and services, although most of the very high inflation figures from last year have focused on goods, reflecting the severe demand and supply bottlenecks that have particularly affected the latter.”

Supply bottlenecks

“Amid high demand for goods, global distribution networks have been strained and domestic manufacturers have struggled to find the materials and labor needed to fulfill orders for their products. U.S. ports were congested with record shipping volumes and lead times for materials remained high Semiconductor supply shortages were particularly acute and weighed heavily on vehicle production and sales While there are some signs of improvement, general supply chain bottlenecks are not expected to resolve for some time.

Statement on long-term objectives and monetary policy strategy

“The primary means available to the Committee to adjust the stance of monetary policy is to change the target range for the federal funds rate. The Committee believes that the level of the federal funds rate consistent with maximum employment stability and long-term prices have declined relatively As a result, the fed funds rate is likely to be constrained by its effective lower bound more frequently than in the past Due, in part, to the proximity of interest rates to at the effective lower limit, the Committee believes that the risk of declining employment and inflation has increased. The Committee is ready to use its full range of tools to achieve its maximum objectives in terms of employment and stability of price.”

“The maximum level of employment is a broad and inclusive goal that is not directly measurable and that changes over time mainly due to non-monetary factors that affect the structure and dynamics of the labor market. Therefore, it does not would not be appropriate to specify a fixed level employment objective.”

“The Committee reaffirms its judgment that inflation at the rate of 2%, as measured by the annual change in the personal consumption expenditure price index, is most consistent over the long term with the Federal Reserve’s statutory mandate. “

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