Monetary Policy Report by US Federal Reserve

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The Federal Reserve has submitted its Monetary policy report to Congress. Let us understand what this report is about and the details of the present report.

What is the Monetary Policy report?

  • As per the Federal Reserve Act, the Federal Reserve Board has to submit written reports to Congress twice a year.
  • The report should contain discussions of the conduct of monetary policy and economic developments and prospects for the future.
  • It is submitted to the Senate Committee on Banking, Housing, and Urban Affairs and to the House Committee on Financial Services, along with testimony from the Federal Reserve Board Chair.
  • Congress gives the Fed a goal, and it has to work towards it. The current goal is - maximum employment and price stability.

Update on the current economic situation

Below are updates given by the Fed:

  • Economic activity expanded at a robust pace of 5.5% last year, reflecting progress on vaccinations and the reopening of the economy, fiscal and monetary policy support, and the healthy financial positions of households and businesses. 
  • However, the labour market is extremely tight. Payroll employment rose by 6.7 million in 2021, and job gains were robust in January. Unemployment has declined in the US over the past year and stood at 4% in January.
  • Inflation in the US increased sharply last year. Currently, it is well above the Fed's longer-run objective of 2%. Demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond. 
  • The supply disruptions have been longer than what the Fed has anticipated. It is driven by waves of the virus, and price increases are now spreading to a broader range of goods and services.

Monetary Policy details

The Fed has acknowledged that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like housing, food, and transportation. The Fed wants to support a strong labour market. According to its members, that is only possible in an environment of price stability.

Interest rate Policy - The Fed understands that inflation is well above the target mark, and hence the Committee expects it will soon be appropriate to raise the target range for the federal funds rate. It expects inflation to decline over the year as supply constraints ease and demand moderates because of the waning effects of fiscal support and the removal of monetary policy accommodation. It plans to use its policy tools to prevent higher inflation from becoming entrenched while promoting a sustainable expansion and a strong labor market.

Update on Balance Sheet - The FOMC, in January, decided to continue to reduce its net asset purchases at an accelerated pace. It will bring them to an end in early March. 

Recent development and impacts - The near-term effects of the invasion of Ukraine, the ongoing war, the sanctions, and events to come, remain highly uncertain on the US economy.

Supply shortage - Supply shortages of semiconductors have been particularly acute and have weighed heavily on motor vehicle production and sales. The Fed added that against a backdrop of robust demand for goods, global distribution networks have been strained. Domestic manufacturers have had trouble finding the materials and labor needed to fill orders for their products. US ports have been congested amid record volumes of shipping.

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 federal funds rate is likely to be constrained by its effective lower bound more frequently than in the past. 

Owing to the proximity of interest rates to the effective lower bound, the Committee judges that downward risks to employment and inflation have increased.