A Message from Governor Bowman
As 2021 draws to a close, I would like to extend my best wishes for a happy and healthy holiday season. We are all grateful for the efforts of community banks to support their communities facing many challenges since the onset of the pandemic. Since that time, our economy has made great strides, which is a testament to the resilience of households and businesses like yours. As we plan for the year ahead, I would like to share my perspective on how the Federal Reserve carries out its monetary policy, my thoughts on the state of the U.S. economy, and my views for the coming year.
The Fed’s Responsibilities and How We Carry Out Monetary Policy
The Federal Reserve conducts monetary policy to support a strong and stable U.S. economy. Our official mandate from Congress is to pursue two goals, maximum employment and stable prices, which are often referred to together as our dual mandate. In pursuing both at the same time, the Federal Reserve seeks the maximum level of employment that is consistent with price stability. Our monetary policy framework references an annual inflation rate of 2 percent as most consistent with the long-term goal of stable prices.
Monetary policy decisions are made by the members of the Federal Open Market Committee (FOMC), which meets eight times each year.1 In preparation for each FOMC meeting, we analyze the latest economic data and assess where the economy stands relative to our two mandated goals.2
Since joining the Federal Reserve Board (Board) three years ago, I have participated in more than 20 meetings as a member of the FOMC. During the meetings, each participant presents their economic outlook, which gives me the opportunity to consider a range of forecasts of U.S. economic activity. Economic forecasting is challenging, to say the least. In preparing for each FOMC meeting, I spend a considerable amount of time focusing on economic and financial data we receive from a variety of sources and qualitative information from my own outreach.
I regularly conduct extensive outreach to gather timely information from a broad range of industries and geographic areas. One of these opportunities is the Fed Listens initiative. Fed Listens is a series of important outreach events that allow me to hear from a range of different voices about their experiences in the local and regional economies and how broader economic conditions affect them.
I also routinely speak with local community bankers, who are excellent sources to help me better understand the important effects of monetary policy decisions on Main Street. During the pandemic, I began to engage in one-on-one discussions with the leaders of the more than 650 state member community banks in the Federal Reserve’s supervisory portfolio. The conversations thus far have provided considerable insight and perspective into national and regional economic conditions. With this perspective, and relying on my rural Kansas background, I also pay close attention to developments in rural communities and in the agriculture sector, monitoring the effect of Fed policy in those areas.
As a member of the Board, I receive valuable input throughout the year from several advisory councils. Recently, the Board met with the Federal Advisory Council (FAC) and the Community Depository Institutions Advisory Council (CDIAC). The FAC confers with the Board on economic and banking developments during four meetings each year. It consists of 12 members, one from each Federal Reserve District.3 The CDIAC meets with the Board twice each year, providing views on the economy, lending conditions, and other issues. Members of the CDIAC serve on Federal Reserve Bank local advisory councils and have experience working in smaller depository institutions.4 Official summaries of these council discussions are posted on the Board’s public website.5
Current Economic Conditions
Now that I've given you an idea of how I prepare for FOMC discussions, let me describe my view of current economic conditions and my outlook for the economy.
There has been steady progress toward maximum employment this year. In February 2020, unemployment stood at 3.5 percent. By April, unemployment had risen to 14.8 percent during the height of the social distancing and economic restrictions imposed during the pandemic. But output and employment have been gaining since May 2020, and unemployment now stands at 4.2 percent, which is a considerable improvement. Demand for labor has been very strong this year: Job gains have averaged about 400,000 per month over the past three months, down somewhat from the average pace of 567,000 per month in the first half of the year, but still remarkably strong.
The biggest challenge we face in maintaining the pace of job gains is a shortage of qualified workers in many sectors. Job openings continue to hover around record levels, and employers consistently tell me they are worried about filling jobs and retaining workers. Although initial estimates from the August, September, and October increase in payrolls were smaller than many had predicted, the estimates were revised up substantially in subsequent jobs reports. These large revisions emphasize the importance of caution when interpreting data during a period of remarkable economic expansion. And going forward, I expect to see a continuation of employment growth, especially in those sectors most adversely affected by the pandemic.
As we look to the new year, one area I will continue to watch closely is inflation. Earlier this year, as the economy reopened, we saw a pronounced pickup in inflation, as prices for motor vehicles, electronics, and other goods rose especially rapidly. Some of these increases could be traced to bottlenecks in global supply chains. The bottlenecks have often been the direct result of shortages of labor and key materials used in production and distribution.
I expect that the bottlenecks will eventually be resolved, and that inflation will gradually step down from the current high rates. But at the same time, I still see a risk that these supply pressures could last longer than expected.
The labor shortages I referenced earlier are another source of inflation risk. Workers are in high demand, and employers are offering inducements, including bonuses and higher wages, to attract new employees. Wage increases and these additional workforce investments add to business expenses, likely contributing to inflationary pressures, and may be passed on to consumers.
Rapidly rising home prices also pose risks to inflation, in addition to raising potential concerns about valuation pressures. The ongoing strength in housing demand is also notably driving up rental costs.
While short-term inflation expectations have moved up in an apparent response to higher inflation this year, measures of longer-term inflation expectations have generally remained broadly consistent with our 2 percent inflation goal. However, if elevated inflation readings persist, we could see an unwelcome rise in longer-run inflation expectations. Should this occur, I would support further adjustments of our monetary policy. This is relevant because the Fed has long considered the anchoring of longer-run inflation expectations as an important condition for meeting our monetary policy goals.
In conclusion, our economy has made great strides this year, and I expect this to continue in the coming months. That said, my colleagues and I will be watching inflation closely.
- 1 Except in very unusual circumstances, monetary policy decisions are made during our regular FOMC meetings. The 12 Reserve Bank presidents and the members of the Federal Reserve Board of Governors participate in these meetings, with five of the 12 presidents and all of the Governors voting as members of the FOMC.
- 2 For a list of FOMC members, see www.federalreserve.gov/monetarypolicy/fomc.htm.
- 3 See www.federalreserve.gov/aboutthefed/fac.htm.
- 4 See www.federalreserve.gov/aboutthefed/cdiac.htm.
- 5 See www.federalreserve.gov/aboutthefed/advisorydefault.htm.