Jerome H Powell: Semiannual Monetary Policy Report to the
Congress
Testimony by Mr Jerome H Powell, Chairman of the Board of Governors of the Federal Reserve
System, before the Committee on Financial Services, US House of Representatives,
Washington DC, 27 February 2018.
* * *
Chairman Hensarling, Ranking Member Waters, and members of the Committee, I am pleased
to present the Federal Reserve's semiannual Monetary Policy Report to the Congress.
On the occasion of my first appearance before this Committee as Chairman of the Federal
Reserve, I want to express my appreciation for my predecessor, Chair Janet Yellen, and her
important contributions. During her term as Chair, the economy continued to strengthen and
Federal Reserve policymakers began to normalize both the level of interest rates and the size of
the balance sheet. Together, Chair Yellen and I have worked to ensure a smooth leadership
transition and provide for continuity in monetary policy. I also want to express my appreciation for
my colleagues on the Federal Open Market Committee (FOMC). Finally, I want to affirm my
continued support for the objectives assigned to us by the Congress-maximum employment
and price stability-and for transparency about the Federal Reserve's policies and programs.
Transparency is the foundation for our accountability, and I am committed to clearly explaining
what we are doing and why we are doing it. Today I will briefly discuss the current economic
situation and outlook before turning to monetary policy.
Current Economic Situation and Outlook
The U.S. economy grew at a solid pace over the second half of 2017 and into this year. Monthly
job gains averaged 179,000 from July through December, and payrolls rose an additional
200,000 in January. This pace of job growth was sufficient to push the unemployment rate down
to 4.1 percent, about 3/4 percentage point lower than a year earlier and the lowest level since
December 2000. In addition, the labor force participation rate remained roughly unchanged, on
net, as it has for the past several years-that is a sign of job market strength, given that retiring
baby boomers are putting downward pressure on the participation rate. Strong job gains in recent
years have led to widespread reductions in unemployment across the income spectrum and for
all major demographic groups. For example, the unemployment rate for adults without a high
school education has fallen from about 15 percent in 2009 to 5-1/2 percent in January of this
year, while the jobless rate for those with a college degree has moved down from 5 percent to 2
percent over the same period. In addition, unemployment rates for African Americans and
Hispanics are now at or below rates seen before the recession, although they are still
significantly above the rate for whites. Wages have continued to grow moderately, with a modest
acceleration in some measures, although the extent of the pickup likely has been damped in part
by the weak pace of productivity growth in recent years.
Turning from the labor market to production, inflation-adjusted gross domestic product rose at an
annual rate of about 3 percent in the second half of 2017, 1 percentage point faster than its pace
in the first half of the year. Economic growth in the second half was led by solid gains in
consumer spending, supported by rising household incomes and wealth, and upbeat sentiment.
In addition, growth in business investment stepped up sharply last year, which should support
higher productivity growth in time. The housing market has continued to improve slowly.
Economic activity abroad also has been solid in recent quarters, and the associated
strengthening in the demand for U.S. exports has provided considerable support to our
manufacturing industry.
Against this backdrop of solid growth and a strong labor market, inflation has been low and
stable. In fact, inflation has continued to run below the 2 percent rate that the FOMC judges to be
most consistent over the longer run with our congressional mandate. Overall consumer prices,
as measured by the price index for personal consumption expenditures (PCE), increased 1.7
percent in the 12 months ending in December, about the same as in 2016. The core PCE price
index, which excludes the prices of energy and food items and is a better indicator of future
inflation, rose 1.5 percent over the same period, somewhat less than in the previous year. We
continue to view some of the shortfall in inflation last year as likely reflecting transitory influences
that we do not expect will repeat; consistent with this view, the monthly readings were a little
higher toward the end of the year than in earlier months.
After easing substantially during 2017, financial conditions in the United States have reversed
some of that easing. At this point, we do not see these developments as weighing heavily on the
outlook for economic activity, the labor market, and inflation. Indeed, the economic outlook
remains strong. The robust job market should continue to support growth in household incomes
and consumer spending, solid economic growth among our trading partners should lead to
further gains in U.S. exports, and upbeat business sentiment and strong sales growth will likely
continue to boost business investment. Moreover, fiscal policy is becoming more stimulative. In
this environment, we anticipate that inflation on a 12-month basis will move up this year and
stabilize around the FOMC's 2 percent objective over the medium term. Wages should increase
at a faster pace as well. The Committee views the near-term risks to the economic outlook as
roughly balanced but will continue to monitor inflation developments closely.
Monetary Policy
I will now turn to monetary policy. The Congress has assigned us the goals of promoting
maximum employment and stable prices. Over the second half of 2017, the FOMC continued to
gradually reduce monetary policy accommodation. Specifically, we raised the target range for the
federal funds rate by 1/4 percentage point at our December meeting, bringing the target to a
range of 1-1/4 to 1-1/2 percent. In addition, in October we initiated a balance sheet normalization
program to gradually reduce the Federal Reserve's securities holdings. That program has been
proceeding smoothly. These interest rate and balance sheet actions reflect the Committee's
view that gradually reducing monetary policy accommodation will sustain a strong labor market
while fostering a return of inflation to 2 percent.
In gauging the appropriate path for monetary policy over the next few years, the FOMC will
continue to strike a balance between avoiding an overheated economy and bringing PCE price
inflation to 2 percent on a sustained basis. While many factors shape the economic outlook,
some of the headwinds the U.S. economy faced in previous years have turned into tailwinds: In
particular, fiscal policy has become more stimulative and foreign demand for U.S. exports is on a
firmer trajectory. Despite the recent volatility, financial conditions remain accommodative. At the
same time, inflation remains below our 2 percent longer-run objective. In the FOMC's view,
further gradual increases in the federal funds rate will best promote attainment of both of our
objectives. As always, the path of monetary policy will depend on the economic outlook as
informed by incoming data.
In evaluating the stance of monetary policy, the FOMC routinely consults monetary policy rules
that connect prescriptions for the policy rate with variables associated with our mandated
objectives. Personally, I find these rule prescriptions helpful. Careful judgments are required
about the measurement of the variables used, as well as about the implications of the many
issues these rules do not take into account. I would like to note that this Monetary Policy Report
provides further discussion of monetary policy rules and their role in the Federal Reserve's policy
process, extending the analysis we introduced in July.
Thank you. I would be pleased to take your questions.