Recently, the US Senate banking, housing and Urban Affairs Committee held a hearing on the nomination of Powell for re-election as chairman of the Federal Reserve. Powell analyzed the U.S. economic situation before and after the epidemic, stressed the need to tighten monetary policy to combat high inflation, and expounded on issues such as interest rate increase, table contraction and financial supervision. Mainly focus on the following three points.
First, inflationary pressure has forced the fed to increase interest rates. Although the epidemic continues, the rapid recovery of economic momentum has triggered continuous supply-demand imbalance and bottlenecks, leading to rising inflation. According to the data of the U.S. Department of labor, the U.S. CPI increased by 7% year-on-year in December 2021, exceeding 6% for three consecutive months, reaching the highest level in 40 years. On the supply side, production, transportation and labor shortage affect the production of manufacturing goods. The supply chain cannot match the demand of consumers for physical goods in the short term, resulting in the continuous rise of inflation in the prices of cars and other durable goods. On the demand side, since the epidemic, the ultra loose monetary policy combined with fiscal stimulus has promoted the strong growth of residents\' consumption demand, resulting in the year-on-year growth of core personal consumption expenditure (PCE) of 5.5% in December 2021. At present, the U.S. job market is recovering strongly and the unemployment rate has dropped to 3.9%. Compared with the Fed's full employment target, Powell believes that "we need to pay attention to inflation and maintain price stability a little more". Monetary policy must have a broad and forward-looking perspective, keep pace with the changing economy and avoid entrenching high inflation. At the same time, Powell gave a specific road map for the normalization of U.S. monetary policy, that is, end the asset purchase plan in March 2022 and start raising interest rates within the year.
Second, the balance sheet reduction plan will be carried out earlier and faster. Since the outbreak of the epidemic in March 2020, the Federal Reserve has launched the ultra loose monetary policy of large-scale asset purchase, which has more than doubled the asset scale of the central bank to reach the historical peak of US $8.77 trillion. Powell believes that the balance sheet of nearly $9 trillion is "much higher than the actual required level", and the Federal Reserve will provide "clearer forward-looking guidance" by convening two to four FOMC meetings and publish clear details of the scale reduction. In the short term, compared with the situation before the scale reduction in 2018, the current Federal Reserve's balance sheet has expanded significantly, resulting in the scale reduction will be carried out earlier and faster. In the long run, with the gradual recovery of the economy after the epidemic, a significant reduction in the size of the balance sheet will be a crucial tool for the Federal Reserve. The reduction will provide the Federal Reserve with more means to reduce easing without reversing the yield curve.
