The Federal Reserve Board (FRB) has submitted the first of its two semiannual written reports to Congress for 2022. Called the "Monetary Policy Report," it discusses "the conduct of monetary policy and economic developments and prospects for the 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 Chair Jerome Powell will testify before the House committee on March 2, 2022, and before the Senate committee on March 3, 2022. This report will provide the basis for his prepared remarks during those sessions. Below we present selected highlights from the report, which was submitted to Congress on Feb. 25, 2022.
- The Federal Reserve has submitted the first of its two semi-annual reports to Congress for 2022.
- This offers a preview of Fed Chair Jerome Powell's testimony before Congress on March 2-3, 2022.
- With inflation running high, and amid a strong labor market, the Fed expects to raise the federal funds rate and reduce its balance sheet.
"U.S. economic activity posted further impressive gains in the second half of last year, but inflation rose to its highest level since the early 1980s. The labor market tightened substantially further amid high demand for workers and constrained supply, with the unemployment rate reaching the median of Federal Open Market Committee (FOMC) participants' estimates of its longer-run normal level and nominal wages rising at their fastest pace in decades."
"[I]nflation increased appreciably last year, running well above the FOMC's longer-run objective of 2 percent and broadening out to a wider range of items. As 2022 began, the rapid spread of the Omicron variant appeared to be causing a slowdown in some sectors of the economy, but with Omicron cases having declined sharply since mid-January, the slowdown is expected to be brief."
"[N]et asset purchases will end in early March. With inflation well above the FOMC's longer-run objective 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 the Labor Market
"The unemployment rate has plummeted almost 2 percentage points since June and, at 4 percent in January, has reached the median of FOMC participants' estimates of its longer-run normal level. Moreover, unemployment declines have been widespread across demographic groups. That said, labor force participation only crept up last year and remains constrained. The tight labor supply, in conjunction with a continued surge in labor demand, has resulted in strong nominal wage growth, especially for low-wage workers. Supply bottlenecks also continued to significantly limit activity."
"Upward pressure on inflation from prices of goods experiencing both supply chain bottlenecks and strong demand, such as motor vehicles and furniture, has persisted, and elevated inflation has broadened out to a wider range of items. Services inflation has also stepped up further, reflecting strong wage growth in some service sectors and a significant increase in housing rents ... measures of longer-term inflation expectations have moved up only modestly; they remain in the range observed over the decade before the pandemic and thus appear broadly consistent with the FOMC's longer-run inflation objective of 2 percent."
"Financing conditions for consumer credit continue to be largely accommodative except for borrowers with low credit scores. Mortgage rates for households remain low despite recent increases. Bank lending standards have eased across most loan categories, and bank credit has expanded. All told, financing conditions have been accommodative for businesses and households."
"While some financial vulnerabilities remain elevated, the large banks at the core of the financial system continue to be resilient ... Nonfinancial-sector leverage has broadly declined, and credit growth in the household sector has been driven almost exclusively by residential mortgages and auto loans to prime-rated borrowers. Vulnerabilities from financial-sector leverage are within their historical range ... Domestic banks continue to maintain significant levels of high-quality liquid assets ... The Federal Reserve continues to evaluate the potential systemic risks posed by hedge funds and digital assets."
"Foreign GDP has continued to recover briskly, on balance, despite successive waves of the pandemic ... Inflation rose notably in many economies in the second half of last year, importantly boosted by higher energy and other commodity prices as well as supply chain constraints ... Foreign financial conditions have tightened modestly but are generally contained ... Recent geopolitical tensions related to the Russia–Ukraine situation are a source of uncertainty in global financial and commodity markets."
Interest Rate Policy
"With inflation well above the Committee's [i.e., the FOMC's] 2 percent longer-run goal and a strong labor market, the Committee expects 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 reduce its net asset purchases at this accelerated pace, which will bring them to an end in early March ... A number of participants at the meeting commented that conditions would likely warrant beginning to reduce the size of the balance sheet sometime later this year."
"In assessing the appropriate stance of monetary policy, the Committee is firmly committed to its price-stability and maximum-employment goals and is prepared to use its tools to prevent higher inflation from becoming entrenched while promoting a sustainable expansion and strong labor market."
Low Labor Supply
"Labor supply has been slow to rebound even as labor demand has been remarkably strong. The labor force participation rate remains well below estimates of its longer-run trend, principally reflecting a wave of retirements among older individuals and increases in the number of people out of the labor force and engaged in caregiving responsibilities."
Wage and Employment Growth Across Jobs and Workers
"Wage and employment gains were widespread across jobs and industries last year, with the lowest-wage jobs experiencing the largest gains in both median wages and employment ... Median wages also increased across racial and ethnic groups, leaving differences in wage levels across groups little changed relative to 2019."
Broadening of Inflation
"Higher PCE [Personal Consumption Expenditures] price inflation broadened out over the course of 2021 ... The broadening was evident in both goods and services, though most of last year's very high inflation readings were concentrated in goods, a reflection of the strong demand and supply bottlenecks that have particularly affected these items."
"Against a backdrop of robust demand for goods, global distribution networks have been strained, and domestic manufacturers have had trouble finding the materials and labor needed to fill orders for their products. U.S. ports have been congested amid record volumes of shipping, and delivery times for materials have remained elevated. Supply shortages of semiconductors have been particularly acute and have weighed heavily on motor 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 Longer-Run Goals and Monetary Policy Strategy
"The Committee's primary means of adjusting the stance of monetary policy is through changes in the target range for the federal funds rate. The Committee judges that the level of the federal funds rate consistent with maximum employment and price stability over the longer run has declined relative to its historical average. Therefore, the federal funds rate is likely to be constrained by its effective lower bound more frequently than in the past. Owing in part to the proximity of interest rates to the effective lower bound, the Committee judges that downward risks to employment and inflation have increased. The Committee is prepared to use its full range of tools to achieve its maximum employment and price stability goals."
"The maximum level of employment is a broad-based and inclusive goal that is not directly measurable and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the labor market. Consequently, it would not be appropriate to specify a fixed goal for employment."
"The Committee reaffirms its judgment that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate."