I appreciate the opportunity for Chairman McHenry, Ranking Member Waters, and other members of the Committee to present the Federal Reserve’s semiannual Monetary Policy Statement.
At the Federal Reserve, we are fully focused on our dual mandate to promote maximum employment and stable prices for the American people. My colleagues and I understand the strain that high inflation causes, and we are committed to bringing inflation back to our 2 percent target. Price stability is the responsibility of the Federal Reserve, without which, the economy would not work for anyone. In particular, without price stability, we cannot achieve a sustained period of strong labor market conditions that benefit everyone.
I will review the current economic situation before moving on to monetary policy.
Current Economic Status and Outlook
The U.S. economy slowed significantly last year, and recent indicators suggest economic activity continues to expand at a moderate pace. Although growth in consumer spending has picked up this year, activity in the housing sector has remained weak, largely reflecting higher mortgage rates. High interest rates and slow productivity growth weigh on business fixed investment.
The labor market is very tight. In the first five months of the year, job gains averaged 314,000 jobs a month. The unemployment rate rose, but remained low at 3.7 percent in May. There are some signs that supply and demand are coming into better balance in the labor market. The labor force participation rate has increased in recent months, especially for individuals aged 25 to 54. Nominal wage growth has shown few signs of easing, and job growth has slowed so far this year. Although the jobs-labor gap has narrowed, the demand for labor still significantly exceeds the supply of available labor.1
Inflation is above our long-term target of 2 percent. In the 12 months ended April, total personal consumption expenditures (PCE) prices rose 4.4 percent; Core PCE prices, excluding volatile food and energy categories, rose 4.7 percent. In May, the 12-month change in the Consumer Price Index (CPI) came in at 4.0 percent, and the change in the core CPI was 5.3 percent. Inflation has moderated somewhat since the middle of last year. Nevertheless, inflationary pressures continue to rise, and the process of reducing inflation to 2 percent has a long way to go. Despite high inflation, long-term inflation expectations were reflected in a wide range of surveys of households, businesses and forecasters, as well as actions in financial markets.
With inflation above our long-term target of 2 percent and labor market conditions tightening, the Federal Open Market Committee (FOMC) has significantly tightened the stance of monetary policy. We have raised our policy interest rate by 5 percentage points since the start of last year and continue to reduce our bond holdings at a brisk pace.2 We are seeing the effects of our policy tightening on demand in the most interest rate-sensitive sectors of the economy. However, it will take time for the full effects of monetary controls to be felt, especially on inflation.
The economy faces headwinds from tight credit conditions for households and businesses, which could weigh on economic activity, hiring and inflation.3 The magnitude of these effects remains uncertain.
How far we’ve come in tightening policy In light of the uncertainty of monetary policy setbacks affecting the economy and potential headwinds from credit tightening, the FOMC decided last week to maintain the target range for the federal funds rate at 5 to 5. 1/4 percent and continue the process of significantly reducing our bond holdings. Almost all FOMC participants expect it will be appropriate to raise interest rates slightly more by the end of the year. But at last week’s meeting, given how far and how fast we’ve moved, we decided it was prudent to keep the target range steady to allow the committee to assess additional information and its implications for monetary policy. In determining the level of additional policy tightening that would be appropriate to return inflation to 2 percent over time, we will take into account the overall tightening of monetary policy, monetary policy setbacks affecting economic activity and inflation, and economic and financial developments. . We will meet our conclusions based on the aggregate of incoming data and their implications for the outlook and balance of risks to economic activity and inflation.
We remain committed to bringing inflation back to our 2 percent target and keeping long-term inflation expectations well-positioned. Lowering inflation will require lower trend growth and some softening in labor market conditions. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices in the long run.
Before concluding, let me summarize the state of the banking sector. The US banking system is stable and resilient. As described in the box on financial stability in June Monetary Policy Statement, The Federal Reserve, along with the Treasury Department and the Federal Deposit Insurance Corporation, took decisive action in March to protect the American economy and strengthen public confidence in our banking system. Recent bank failures, including the failure of Silicon Valley Bank, and the resulting banking stresses highlight the importance of ensuring we have appropriate rules and supervisory procedures in place for banks of this size. We are committed to addressing these vulnerabilities to build a stronger and more resilient banking system.
We understand that our actions affect communities, families and businesses across the country. Everything we do is in service of our public mission. We at the central bank will do everything we can to achieve our maximum employment and price stability goals.
Thanks. I am happy to take your questions.
1. In our latest box Monetary Policy Statement, “Employment and Earnings Developments Across Population Groups,” discusses differences in labor market outcomes among segments of the population. Return to text
2. In our latest box Monetary Policy Statement, “Developments in the Federal Reserve Balance Sheet and Money Markets” discusses changes in the size of the Federal Reserve’s balance sheet. Return to text