Jerome Powell’s Semiannual Monetary Policy Report; Strong Wage Growth; Inflation, Labor Market, Unemployment, Job Gains, 2 Percent Inflation

Chair Powell submitted identical remarks to the Committee on Financial Services, U.S. House of Representatives, on March 8, 2023.

Chairman Brown, Ranking Member Scott, and other members of the Committee, I appreciate the opportunity to present the Federal Reserve’s semiannual Monetary Policy Report.

Right, Chair Powell;REUTERS/Kevin Lamarque

My colleagues and I are acutely aware that high inflation is causing significant hardship, and we are strongly committed to returning inflation to our 2 percent goal. Over the past year, we have taken forceful actions to tighten the stance of monetary policy. We have covered a lot of ground, and the full effects of our tightening so far are yet to be felt. Even so, we have more work to do. Our policy actions are guided by our dual mandate to promote maximum employment and stable prices. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of labor market conditions that benefit all.

I will review the current economic situation before turning to monetary policy.

Current Economic Situation and Outlook
The data from January on employment, consumer spending, manufacturing production, and inflation have partly reversed the softening trends that we had seen in the data just a month ago. Some of this reversal likely reflects the unseasonably warm weather in January in much of the country. Still, the breadth of the reversal along with revisions to the previous quarter suggests that inflationary pressures are running higher than expected at the time of our previous Federal Open Market Committee (FOMC) meeting.

From a broader perspective, inflation has moderated somewhat since the middle of last year but remains well above the FOMC’s longer-run objective of 2 percent. The 12-month change in total personal consumption expenditures (PCE) prices has slowed from its peak of 7 percent in June to 5.4 percent in January as energy prices have declined and supply chain bottlenecks have eased.

Over the past 12 months, core PCE inflation, which excludes the volatile food and energy prices, was 4.7 percent. As supply chain bottlenecks have eased and tighter policy has restrained demand, inflation in the core goods sector has fallen. And while housing services inflation remains too high, the flattening out in rents evident in recently signed leases points to a deceleration in this component of inflation over the year ahead.

That said, there is little sign of disinflation thus far in the category of core services excluding housing, which accounts for more than half of core consumer expenditures. To restore price stability, we will need to see lower inflation in this sector, and there will very likely be some softening in labor market conditions. Although nominal wage gains have slowed somewhat in recent months, they remain above what is consistent with 2 percent inflation and current trends in productivity. Strong wage growth is good for workers but only if it is not eroded by inflation.