In the early morning of March 22, Beijing time, Fed Chairman Powell delivered a speech entitled “Restoring Price Stability” at the 38th Annual Economic Policy Conference of the National Association of Business Economics.
Powell admitted that two years ago, more than 20 million people were unemployed, millions were sick, and their lives were disrupted. America has come a long way since then. The labor market is very strong today. However, inflation is too high. The Fed has the necessary tools, and the Fed will use them to restore price stability.
Powell said the picture is clear: the labor market is very strong and inflation is much higher. My colleagues and I are acutely aware that high inflation creates enormous hardship, especially for those least able to pay the high cost of necessities like food, housing and transportation. Even before the Russia-Ukraine conflict, the U.S. inflation outlook had deteriorated significantly this year. The rise in inflation was much larger and more persistent than forecasters had widely expected.
An important part of the explanation, Powell said, is that forecasters generally underestimate the severity and persistence of supply-side friction, which occurs when supply-side friction is associated with strong demand (especially demand for durable goods) combined to produce surprisingly high inflation.
Powell said that as the magnitude and persistence of the rise in inflation in the second half of last year became more apparent and the labor market recovered faster than expected, the Fed turned to Gradually reduce loose monetary policy. The median forecast, released in tandem with last week’s 25 basis point hike, put the federal funds rate at 1.9 percent by the end of the year and will rise above its long-term normal in 2023.
How can price stability be restored?
Powell reiterated that the Fed will take necessary steps to ensure prices return to stability. In particular, the Fed will do so if it deems it more aggressive to raise the federal funds rate by more than 25 basis points at one or more meetings. If it decides it needs to tighten monetary policy beyond the usual neutral standard, the Fed will do the same. In recent times, short-term inflation expectations have certainly risen with inflation, but long-term expectations have remained stable within historical ranges. The Russia-Ukraine conflict has added short-term upward pressure on energy, food and other commodity inflation at a time when inflation is already too high. In normal times, when employment and inflation are close to our targets, monetary policy takes into account short-lived inflation associated with commodity price shocks. However, the risk that a prolonged period of high inflation could push up longer-term expectations is rising, suggesting that the Committee needs to act quicklytake action.
How will the consequences of the Russian-Ukrainian conflict affect U.S. economic and monetary policy?
Powell believes this could have a major impact on the world economy and the U.S. economy. The magnitude and duration of these effects remain highly uncertain and depend on future events. Russia is one of the world’s largest producers of commodities, and Ukraine is also a major producer of several commodities, including wheat and neon, which is used to make computer chips. With such a wide range of commodities, there has been no major market disruption recently. In addition to the immediate impact of rising global oil and commodity prices, related events could limit economic activity overseas and further disrupt supply chains, which will have spillover effects on the U.S. economy.
“We can look at the historical experience of oil price shocks in the 1970s. Fortunately, the United States is now better able to withstand oil price shocks. We are now the world’s largest of oil-producing countries, our economy is significantly less dependent on oil than it was in the 1970s. Today, rising oil prices have a mixed effect on the economy, reducing real household income and thus demand, but over time Over time, investment in drilling has increased, benefiting oil-producing regions generally. In general, oil shocks tend to drag down the output of the U.S. economy, but not as much as in the 1970s.”
How likely is monetary policy to reduce inflation without causing a recession?
Powell noted that the Fed’s goal is to restore price stability while promoting another long-term expansion and maintaining a strong labor market. In the Fed’s forecast, the economy could achieve a soft landing, with inflation falling and unemployment holding steady. Growth slowed as the rapid growth in the early days of reopening faded, the effect of fiscal support waned, and monetary policy easing was withdrawn.
“I believe the historical record provides some reason for optimism: Soft landings, or at least somewhat soft landings, have been relatively common in U.S. monetary history. In 1965, 1984 and In three events in 1994, the Federal Reserve significantly raised the federal funds rate in response to perceived overheating without triggering a recession. In other cases, recessions occurred chronologically after the end of a tightening cycle, but recessions were clearly not Due to over-tightening of monetary policy. It is worth noting that the economy today is very strong and can handle tighter monetary policy well.”