This serves as a note to quickly understand Powell’s thinking about the economy, labor market, and inflation. Powell’s most recent speech was at the FOMC press conference on Dec. 15, 2021. To begin with, note the Fed has two missions/goals: (1) maximum employment and (2) price stability. Thus, let us see what Powell (and Fed) thought on Dec. 15, 2021.
1. Maximum Employment
Overall, Powell believed that the maximum employment aspect was great since the unemployment rate was 4.2% in November. Thus, this was not a major concern for Federal Reserve.
The unemployment rate has declined substantially—falling 6/10 of a percentage point since our last meeting and reaching 4.2 percent in November.
First, for the inflation, Powell expected that the high inflation problem would continue into the year 2022. The reason is due to the imbalance between supply and demand.
Supply and demand imbalances related to the pandemic and [to] the reopening of the economy have continued to contribute to elevated levels of inflation. In particular, bottlenecks and supply constraints are limiting how quickly production can respond to higher demand in the near term. These problems have been larger and longer lasting than anticipated, exacerbated by waves of the virus. As a result, overall inflation is running well above our 2 percent longer-run goal and will likely continue to do so well into next year.
For the labor wage and inflation, as of Dec. 15, 2021, Powell did not believe that the higher wages are the reasons for inflation. That is, Powell in general believed that it is due to the imbalance between supply and demand.
Looking forward especially in the year 2022, the FOMC committee expected to have an average of 2% inflation by the end of 2022. (I believe that it is tricky. However, we need to pay attention to the inflation numbers coming.)
Like most forecasters, we continue to expect inflation to decline to levels closer to our 2 percent longer-run goal by the end of next year. The median inflation projection of FOMC participants falls from 5.3 percent this year to 2.6 percent next year; this trajectory is notably higher than projected in September.
3. Fed’s 2022 Plan
Federal Reserve planned to adopt items to address the problem of inflation.
(1) Federal Funds Effective Rate
The Fed is expected to have 0.9 by the end of 2022, which is 0.5% higher than the projection in September 2021. Based on this website (https://fred.stlouisfed.org/series/FEDFUNDS), the rate was 0.8% in Dec. 2021. The median projection for the appropriate level of the federal funds rate is 0.9 percent at the end of 2022, about ½ percentage point higher than projected in September.
(2) Treasury and Agency Mortgage-backed Securities
Fed will reduce both Treasury securities and mortgage-backed securities. With this pace of reduction, Fed will stop security purchases by March, which is one month earlier than expected in November. (Note that this was the meeting in December. Thus, Feb changed their plan in one month.)
Beginning in mid-January, we will reduce the monthly pace of our net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities. If the economy evolves broadly as expected, similar reductions in the pace of net asset purchases will likely be appropriate each month, implying that increases in our securities holdings would cease by mid-March—a few months sooner than we anticipated in early November.
4. Expectation of Jan. 26, 2022 Meeting
To be honest, I do not expect Fed to change their plan a lot. This is due to the fact that inflation is still high and the unemployment rate is low. Thus, I would not expect the market will hear something really unexpected from Powell at the Jan. 26 news conference. I would expect Powell to reiterate what he said in Dec. 2021. I will write another summary after Jan. 26 press conference.