The economy no longer needs and no longer wants a highly expansive and accommodating policy: the time has come to move forward with respect to the pandemic emergency. This was stated by the president of the Fed, Jerome Powell, during the hearing before the Senate called to ratify the decision of President Joe Biden to renew his mandate. Powell then stressed that the labor market is “recovering incredibly quickly.” The road to a return to “normalcy” for monetary policy is however “long”, but the real enemy of the recovery is once again inflation.
The Fed, therefore, will use “all its tools to support the economy and a solid labor market and to prevent inflation from taking root. The economy has rapidly strengthened despite the ongoing pandemic – added Powell – giving rise to persistent imbalances and bottlenecks between supply and demand and therefore to high inflation. We know that high inflation takes a toll, particularly for those who are less able to meet the higher costs of essentials such as food, housing and transportation. We are strongly committed to achieving our statutory objectives of maximum employment and price stability ».
According to Powell, “we can begin to see that the post-pandemic economy is likely to be different in some respects and the pursuit of our goals will have to take these differences into account. To this end, monetary policy must have a broad and far-sighted vision, in step with a constantly evolving economy ».
In particular, the head of the Fed recalled that over the past four years, my colleagues and I have continued the work of our predecessors to ensure a strong and resilient financial system. We have increased the capital and liquidity requirements for the largest banks and currently, the capital and liquidity levels of our largest and systemically important banks are at their highest for many decades. We have worked to improve public access to instant payments, intensified our focus and oversight efforts on evolving threats such as climate change and cyberattacks, and expanded our analysis and monitoring of financial stability. We will remain vigilant for new and emerging threats ».
And consequently, “if we see inflation persist longer than expected then we will raise interest rates several times.” For the moment, three rate hikes are expected in 2022, “but it will depend on the data”. The tapering will conclude, however, in March when the purchases of securities on the secondary market will end to increase the liquidity in circulation.