During a panel discussion, the topic of U.S. monetary policy was addressed by a member of the Federal Open Market Committee. U.S. inflation has remained higher than the 2 percent target due to supply and demand imbalances. The labor market has improved, and GDP growth is expected to moderate, although a response from monetary policy will be necessary if there are signs that growth could hinder the progress in restoring balance and reducing inflation.
The sudden rise of inflation during the pandemic saw an unpredicted surge in March and April 2021, with the expectation that it would ease quickly without the need for harsh policy measures. However, as of the fourth quarter of 2021, persistent high inflation persisted due to interruptions in global supply chains and relatively slow progress in restoring labor force. Monetary policy has seen adjustments with a raise in the federal funds rate target range by 5-1/4 percentage points and a reduction in securities holdings by over $1 trillion in order to slow the growth of demand and inflation.
The approach of monetary policy towards supply shocks is under scrutiny due to its limitations, causing uncertainty in a time of extraordinary circumstances. Although the effects of the pandemic subside, a key question that arises is the level at which interest rates will stabilize once the pandemic’s effects are fully behind the economy. Since the late 2010s, nominal interest rates have been in decline, and as the pandemic continued, advanced economies experienced below-target inflation and low or negative policy rates. These issues will need to be addressed as the global economy moves past the pandemic’s ramifications.
