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 outlook for the u. s. economy and my view of appropriate monetary policy. 1 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

many financial holding companies are either entering or expanding merchant banking activities. in particular, examiners have been encouraging banking organizations to expand formal valuation policies and documentation. without these policies, risks may not be estimated in a consistent and timely fashion and communicated to the board and shareholders. such estimation and communication are, of course, of paramount importance in the current environment, where venture capital earnings of more than $ 7. 7 billion at the largest banks in 2000 turned into a loss of more than $ 4. 5 billion in 2001. policies and procedures that promote timely, consistent, and accurate valuations of risk help institutions to identify problems earlier than otherwise would be the case. they also help focus attention on any changes in strategies or limits that might be needed to avoid similar problems in the future. the importance of the third fundamental element, appropriate risk measurement and reporting systems, is well illustrated by the challenges presented by securitization activities. in some cases, securitizations are simple off - balance - sheet financings, where much of the risk of the underlying assets is retained. in other cases, a small portion of the risk is retained, and in still other cases, such as most residential - mortgage securitizations, virtually all the risk is transferred. we expect institutions engaged in this activity to have advanced measurement and information systems to define the underlying risk related to these transactions, including their effect on the institution's overall credit -, liquidity -, and market - risk profile. we also expect institutions to estimate the economic capital needs arising from their securitizations and ensure that they are factored into their own evaluation of capital needs. finally, we expect institutions to have adequate reporting systems that allow them to disclose to the marketplace and regulators the nature of these exposures. as many of you know, the federal reserve has long advocated better disclosure, particularly regarding more - complex risks, in both the domestic and the international arenas. in fact, it is one of the key requirements in the proposed revisions to the basel accord. the test now will be to see if recent events will provide motivation or if the markets will require organizations to more aggressively and creatively educate the marketplace about their true underlying exposures. recognizing the heightened need for disclosure of securitization transactions, the banking agencies, starting in 2001, required banks and their holding companies to disclose the type and amount of assets securitized, the risk exposure retained, and the charge - offs and delinquency