In his post-meeting press conference on Jan. 26, 2022, Federal Reserve Chair Jerome Powell indicated that the Federal Open Market Committee (FOMC) will adhere to the bond purchase schedule that it announced in December 2021. In a process known as tapering, the Fed had announced in December 2021 that it will stop adding to its balance sheet by March 2022.
"Inflation remains well above our long term goal of 2%," Powell noted, observing that "bottlenecks and supply constraints" remain major drivers of price increases, while adding that "price increases have extended beyond these areas." He also stated that "a long expansion requires price stability" and that the Fed will do what it can to "ensure that higher inflation will not become entrenched." In response to a question, he opined that inflation has gotten "just a little bit worse" compared to the situation during the December FOMC meeting.
- The Fed's tapering of bond purchases will continue as announced in December 2021, leading to zero net purchases by March 2022.
- Keeping higher inflation from becoming "entrenched" is a major policy goal for the Fed.
- While the fed funds rate is being kept near zero for now, developments regarding inflation may change that.
- While the economy and the job market are showing robust strength, the ongoing implications of COVID-19 "remain uncertain."
Fed Funds Rate
Powell indicated that the federal funds rate remains the key monetary policy target for the Fed. He said that the target range will remain near zero for now, but that the Fed may change this target in light of developments regarding inflation.
Effect of COVID-19
Powell warned that, with regards to COVID-19, "implications for economy remain uncertain." He observed that a sharp rise in cases due to the omicron variant will weigh on economic activity, in large part because it is causing a decline in labor force participation as some people exit the labor force either to become caregivers or because they are concerned about becoming infected in the workplace. On the other hand, Powell noted that, so far at least, omicron is proving to be less virulent than previous strains.
Strong Labor Market
Powell observed that "economic activity expanded at a robust pace last year." In response to a question, he added that "growth has been above trend," in large part due to "extraordinary measures" taken by the Fed and other branches of government to prop up the economy after COVID-19 struck in 2020.
In particular, he noted that "the labor market has made remarkable progress," with "wages rising at the fastest pace in many years." Against a background of rising inflation, Powell stated that the Fed is watching closely whether wage increases are starting to exceed productivity gains.
Also regarding inflation, Powell said that high inflation can be a brake on employment gains, if workers are discouraged by wages that are not keeping up with price hikes. While inflation hurts all consumers, he noted that it is particularly damaging for lower-income consumers, for whom necessities such as food generally represent higher proportions of their outlays than for higher-income consumers.
At the close of its meeting on Jan. 26, 2022, and prior to Powell's press conference, the FOMC released a statement. Highlights are quoted below.
"Indicators of economic activity and employment have continued to strengthen ... Job gains have been solid in recent months, and the unemployment rate has declined substantially. Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses."
"The path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus."
"The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate."
"In assessing the appropriate stance of monetary policy ... [t]he Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments."