Chairman Brown, Ranking Member Scott, and other members of the Committee, appreciate the opportunity to present the semiannual Federal Reserve Monetary policy report.
The Federal Reserve remains focused on our dual mandate to promote maximum employment and stable prices for the benefit of the American people. Over the past two years, the economy has made significant progress toward the Federal Reserve’s 2 percent inflation target, and labor market conditions have cooled while remaining strong. Reflecting these developments, the risks to achieving our employment and inflation targets are becoming better balanced.
I will review the current economic situation before turning to monetary policy.
Current economic situation and outlook
Recent indicators suggest that the US economy continues to expand at a solid pace. Gross domestic product growth appears to have moderated in the first half of this year, after impressive strength in the second half of last year. Domestic private demand remains strong, however, with slower but still solid growth in consumer spending. We have also seen a moderate increase in capital spending and an increase in residential investment so far this year. Improving supply conditions have supported resilient demand and the strong performance of the US economy over the past year.
In the labor market, a broad set of indicators suggests that conditions are back to where they were on the eve of the pandemic: strong, but not overheated. The unemployment rate has risen, but was still at a low of 4.1 percent in June. Payroll job gains averaged 222,000 jobs per month in the first half of the year. Strong job creation over the past two years has been accompanied by an increase in the supply of workers, reflecting increased labor force participation among individuals aged 25 to 54 and a strong pace of immigration. As a result, the gap between jobs and employees has narrowed greatly from its peak and now stands just above its 2019 level. Nominal wage growth has eased over the past year. The strong labor market has helped narrow longstanding disparities in employment and income across demographic groups.1
Inflation has moderated significantly over the past two years, but remains above the Committee’s long-term target of 2 percent. Total personal consumption expenditures (PCE) prices rose 2.6 percent over the 12 months ending in May. Core PCE prices, which exclude volatile food and energy categories, also rose 2.6 percent. After missing progress towards our 2 percent inflation target earlier this year, the latest monthly readings have shown modest further progress. Longer-term inflation expectations appear to remain well anchored, as reflected in a wide range of household, business and forecaster surveys, as well as readings from financial markets.
monetary policy
Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people. In support of these goals, the Committee has maintained the target range for the federal funds rate at 5-1/4 to 5-1/2 percent since last July, after significantly tightening the stance of monetary policy over the past year. and half. We have also continued to reduce our holdings of securities. At our May meeting, we decided to slow the pace of the state runoff beginning in June, consistent with previously published plans. Our accommodative monetary policy stance is helping to bring supply and demand conditions into better balance and exert downward pressure on inflation.
The Committee has stated that we do not expect it would be appropriate to lower the target range for the federal funds rate until we have gained greater confidence that inflation is moving steadily toward 2 percent. The incoming data for the first quarter of this year does not support such a great confidence. However, the latest inflation readings have shown modest further progress and more good data would strengthen our belief that inflation is moving steadily towards 2 percent.
We continue to make decisions meeting after meeting. We know that easing policy constraints too quickly or too much can hinder or even reverse the progress we’ve seen in inflation. At the same time, in light of the progress made in both reducing inflation and cooling the labor market over the past two years, rising inflation is not the only risk we face. Reducing policy restraint too late or too little can unnecessarily weaken economic activity and employment. In considering adjustments to the target range for the federal funds rate, the Committee will continue its practice of carefully evaluating input data and their implications for the evolving outlook, the balance of risks, and the appropriate path of monetary policy.
Congress has entrusted the Federal Reserve with the operational independence needed to take a longer-term perspective in pursuit of our dual mandate of maximum employment and stable prices. We remain committed to reducing inflation to our 2 percent target and keeping long-term inflation expectations firmly anchored. Restoring price stability is essential to achieving maximum employment and stable prices in the long run. Our success in achieving these goals matters to all Americans.
Let me close by emphasizing that we understand that our actions affect communities, families and businesses across the country. Everything we do is in service of our public mission.
Thank you. I am happy to take your questions.
1. A box in our last Monetary policy report, “Employment and Income across Demographic Groups,” discusses differences in labor market outcomes among population segments. Back to the text