Michelle W Bowman: High inflation and the outlook for monetary
policy
Speech by Ms Michelle W Bowman, Member of the Board of Governors of the Federal Reserve
System, at the American Bankers Association Community Banking Conference, Palm Desert,
California, 21 February 2022.
* * *
Before we get to our conversation on community banking, I would like to briefly discuss my
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outlook for the U.S. economy and my view of appropriate monetary policy. As I see it, the main
challenge for monetary policy now is to bring inflation down without harming the ongoing
economic expansion.
Inflation is much too high. Last year I noted that inflationary pressures associated with strong
demand and constrained supply could take longer to subside than many expected. Since then,
those problems have persisted and inflation has broadened, reaching the highest rate that
Americans have faced in forty years. High inflation is a heavy burden for all Americans, but
especially for those with limited means who are forced to pay more for everyday items, delay
purchases, or put off saving for the future. I intend to support prompt and decisive action to lower
inflation, and today I will explain how the Fed is pursuing this goal.
In the near term, I expect that uncomfortably high inflation will persist at least through the first half
of 2022. We may see signs of inflation easing in the second half of the year, but there is a
substantial risk that high inflation could persist. In January, the Consumer Price Index rose to a
12-month rate of 7.5 percent, which, consistent with other recent monthly readings, was even
higher than expected. Employment costs for businesses, as measured by average hourly
wages, also rose last month. And continued tightness in the labor market indicates that upward
pressure on wages and other employment compensation is not likely to moderate soon.
My base case is that inflation will moderate later this year, which will depend, in part, on
appropriate actions by the Federal Open Market Committee (FOMC). But with wage growth
lagging behind inflation for the past year, many families may find it challenging to make ends
meet and continued rising home prices will likely prevent many from entering the housing market.
In addition, rising costs and hiring difficulties continue to be burdens for small businesses.
Turning to the labor market, which continues to tighten, indications are that the Omicron infection
surge earlier this year has not left a negative imprint on the economy or slowed job creation. I
expect to see continued strength in the job market this year, with further gains in employment,
and my hope is that more Americans return to the labor force and find work. The strength in job
creation is a big positive for those seeking employment and for their families. Even with the
improving labor market, I still hear from businesses that qualified workers are difficult to find, and
labor shortages remain a drag on hiring and on economic growth.
Now let me turn to the implications of this outlook for monetary policy. In my view, conditions in
the labor market have been and are currently consistent with the FOMC's goal of maximum
employment, and as such, my focus has been on the persistently high inflation. In part, the high
inflation reflects supply chain disruptions associated with the economic effects of the pandemic
and efforts made to contain it. Unfortunately, monetary policy isn't well-suited to address supply
issues. But strong demand and a very tight labor market have also contributed to inflation
pressures, and the FOMC can help alleviate those pressures by removing the extraordinary
monetary policy accommodation that is no longer needed.
In our most recent monetary policy statement-which was released following our January
meeting-we indicated that "with inflation well above 2 percent and a strong labor market," we
expected that it would "soon be appropriate to raise the target range for the federal funds rate." I
fully supported that assessment, and the data we have seen since then have only increased the
urgency to get on with the process of normalizing our interest rate stance and significantly
reducing the size of the Federal Reserve's balance sheet. I support raising the federal funds rate
at our next meeting in March and, if the economy evolves as I expect, additional rate increases
will be appropriate in the coming months. I will be watching the data closely to judge the
appropriate size of an increase at the March meeting. In early March, the FOMC will finally stop
expanding the Federal Reserve's balance sheet. The resulting end of our pandemic asset
purchases will remove another source of unneeded stimulus for the economy. In the coming
months, we need to take the next step, which is to begin reducing the Fed's balance sheet by
ceasing the reinvestment of maturing securities already held in the portfolio. Returning the
balance sheet to an appropriate and manageable level will be an important additional step toward
addressing high inflation.
I expect that these steps will contribute to an easing in inflation pressures in the coming months,
but further steps will likely be needed this year to tighten monetary policy. Looking beyond this
spring, my views on the appropriate pace of interest rate increases and balance sheet reduction
for this year and beyond will depend on how the economy evolves. I will be particularly focused
on how much progress we make on bringing down inflation. My intent would be to take forceful
action to help reduce inflation, bringing it back toward our 2 percent goal, while keeping the
economy on track to continue creating jobs and economic opportunity for Americans.
I appreciate the opportunity to share my views on monetary policy with you this morning. But
since we are here to talk about community banking, let's get back to that important topic.
Certainly prior to, but especially over the course of the pandemic, we have seen a heightened
focus and urgency in incorporating technology and innovation into community banking. The
adoption of technology and innovation is really at the heart of the major issues facing community
banks. We see banks, fintech companies, and tech firms exploring various technologies to
enhance their payments systems, expand consumer access, improve back-office operations,
and create new financial products and services.
This interest and the increasing interest in crypto- and digital assets have created a need to work
together with the other federal banking agencies to give the industry better and more useful
regulatory feedback as banks consider approaches to integrating crypto- and digital asset related
activities into their service offerings. Given the popularity of these types of assets, and the
growing interest of banks in participating in the market, it's increasingly necessary for regulators
to be able to engage with the industry on these issues.
Evolving financial services, a sharper focus on efficiency and timeliness in the industry, and the
rapid increase in technology advances have also led the Federal Reserve to explore the potential
benefits and risks of a central bank digital currency (CBDC). We recently issued a discussion
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paper as a first step in fostering a broad and transparent public dialogue about CBDCs. The
paper is not intended to advance any specific policy outcome and no decisions have been made
at this time. We are genuinely committed to hearing a wide range of voices on this issue. The
paper was published earlier this year with a 120-day comment period. We encourage your
comments and feedback-generally, and in response to specific questions posed in the paper.
As we engage in this dialogue and evaluation process, and throughout this initiative, I intend to
keep an open mind about the usefulness of and potential business case for a CBDC. I strongly
encourage community bankers and all of the other stakeholders who would be impacted by the
creation of a CBDC to submit your comments and views to the Fed by May 20, the end of the
scheduled public comment period.
Another area of intense interest is the expansion of financial activities beyond the traditional
chartered banking institution construct. We are seeing an increase in the proposal of novel
charter types under consideration across the country. These changes, and the coming
availability of the Fed Now instant payment service, have the potential to vastly change the
landscape of financial services and opportunities in the market. In anticipation of this evolution,
our Federal Reserve Banks are receiving an increased number of requests for membership and
access to Reserve Bank master accounts from institutions with these novel charters.
Recognizing the importance of clarity and transparency in this space, and to facilitate and
evaluate these activities in a consistent manner, the Board is in the process of issuing clearer
guidance around the application and review process for novel bank charters and account access
at the Federal Reserve.
I look forward to discussing these and other issues with you in just a few minutes, so I will stop
there. It's such a pleasure to be in person with you again at the ABA's Conference for Community
Banks, and I am looking forward to our conversation.
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My views on the outlook and monetary policy are my own and do not necessarily reflect those of my colleagues
on the Federal Open Market Committee. Return to text
2
Board of Governors of the Federal Reserve System, "Federal Reserve Issues FOMC Statement," press release,
January 26, 2022. Return to text
3
Board of Governors of the Federal Reserve System, "Money and Payments: The U.S. Dollar in the Age of Digital
Transformation" (January 2022). Return to text