High Inflation and the Outlook for Monetary Policy By Federal Reserve Governor Michelle W. Bowman
February 21, 2022
High Inflation and the Outlook for Monetary Policy
Governor Michelle W. Bowman
At the American Bankers Association Community Banking Conference, Palm Desert, California
Before we get to our conversation on community banking, I would like to briefly discuss my outlook for the U.S. economy and my view of appropriate monetary policy.1 As I see it, the main challenge for monetary policy now is to bring inflation down without harming the ongoing economic expansion.
Inflation is much too high. Last year I noted that inflationary pressures associated with strong demand and constrained supply could take longer to subside than many expected. Since then, those problems have persisted and inflation has broadened, reaching the highest rate that Americans have faced in forty years. High inflation is a heavy burden for all Americans, but especially for those with limited means who are forced to pay more for everyday items, delay purchases, or put off saving for the future. I intend to support prompt and decisive action to lower inflation, and today I will explain how the Fed is pursuing this goal.
In the near term, I expect that uncomfortably high inflation will persist at least through the first half of 2022. We may see signs of inflation easing in the second half of the year, but there is a substantial risk that high inflation could persist. In January, the Consumer Price Index rose to a 12-month rate of 7.5 percent, which, consistent with other recent monthly readings, was even higher than expected. Employment costs for businesses, as measured by average hourly wages, also rose last month. And continued tightness in the labor market indicates that upward pressure on wages and other employment compensation is not likely to moderate soon.
My base case is that inflation will moderate later this year, which will depend, in part, on appropriate actions by the Federal Open Market Committee (FOMC). But with wage growth lagging behind inflation for the past year, many families may find it challenging to make ends meet and continued rising home prices will likely prevent many from entering the housing market. In addition, rising costs and hiring difficulties continue to be burdens for small businesses.
Turning to the labor market, which continues to tighten, indications are that the Omicron infection surge earlier this year has not left a negative imprint on the economy or slowed job creation. I expect to see continued strength in the job market this year, with further gains in employment, and my hope is that more Americans return to the labor force and find work. The strength in job creation is a big positive for those seeking employment and for their families. Even with the improving labor market, I still hear from businesses that qualified workers are difficult to find, and labor shortages remain a drag on hiring and on economic growth.
Now let me turn to the implications of this outlook for monetary policy. In my view, conditions in the labor market have been and are currently consistent with the FOMC's goal of maximum employment, and as such, my focus has been on the persistently high inflation. In part, the high inflation reflects supply chain disruptions associated with the economic effects of the pandemic and efforts made to contain it. Unfortunately, monetary policy isn't well-suited to address supply issues. But strong demand and a very tight labor market have also contributed to inflation pressures, and the FOMC can help alleviate those pressures by removing the extraordinary monetary policy accommodation that is no longer needed.
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