Before we begin our conversation on community banks, I would like to briefly discuss my outlook for the US economy and my vision for appropriate monetary policy.1 In my view, the main challenge for monetary policy now is to reduce inflation without harming the ongoing economic expansion.

Inflation is way too high. Last year, I noted that the inflationary pressures associated with high demand and limited supply may take longer to subside than many had anticipated. Since then, these problems have persisted and inflation has widened, reaching the highest rate Americans have faced in forty years. High inflation is a heavy burden for all Americans, but especially for those of limited means who are forced to pay more for everyday items, delay purchases, or defer savings for the future. I intend to support quick and decisive action to reduce inflation, and today I will explain how the Fed is pursuing this objective.

In the near term, I expect uncomfortably high inflation to persist at least through the first half of 2022. We could see signs of slowing inflation in the second half, but there is a substantial risk that high inflation persists. In January, the consumer price index reached a 12-month rate of 7.5%, which, in line with other recent monthly readings, was even higher than expected. Business payroll costs, as measured by the average hourly wage, also rose last month. And continued tightness in the labor market indicates that upward pressures on wages and other employment-related compensation are unlikely to ease any time soon.

My base case is that inflation will moderate later this year, which will depend, in part, on appropriate actions by the Federal Open Market Committee (FOMC). But with wage growth below inflation over the past year, many families may struggle to make ends meet and the continued rise in house prices will likely prevent many of them from entering the housing market. In addition, rising costs and hiring difficulties continue to weigh on small businesses.

As for the labor market, which continues to tighten, it appears that the spike in Omicron infections earlier this year has not left a negative imprint on the economy or slowed job creation. . I expect to see continued strength in the job market this year, with further job gains, and hope that more Americans will return to the workforce and find work. The strength of job creation is very positive for job seekers and their families. Even with the labor market improving, I still hear from companies that it’s hard to find skilled workers and that labor shortages continue to hamper hiring and economic growth.

Let me now turn to the implications of this outlook for monetary policy. In my view, labor market conditions have been and are currently in line with the FOMC maximum employment target and as such I have focused on continued high inflation. High inflation partly reflects supply chain disruptions associated with the economic effects of the pandemic and efforts to contain it. Unfortunately, monetary policy is not well suited to solving supply problems. But strong demand and a tight labor market have also contributed to inflationary pressures, and the FOMC can help ease those pressures by removing the extraordinary accommodative monetary policy that is no longer needed.

In our most recent monetary policy statement, which was released following our January meeting, we indicated that “with inflation well above 2% and a strong labor market”, we expected it is “soon appropriate to raise the target range of the federal funds rate.”2 I fully supported that assessment, and the data we have seen since then has only heightened the urgency to continue the process of normalizing our interest rate policy and significantly reducing the size of the balance sheet of the Federal Reserve. I support raising the federal funds rate at our next meeting in March and, if the economy evolves as I expect, further rate increases will be appropriate in the coming months. I will be watching the data closely to judge the appropriate size of an increase at the March meeting. In early March, the FOMC will finally stop expanding the Federal Reserve’s balance sheet. The resulting end to our pandemic asset purchases will remove another source of unnecessary stimulus to the economy. Over the next few months, we will have to take the next step, which is to start reducing the Fed’s balance sheet by ceasing to reinvest the maturing securities already held in the portfolio. Returning the balance sheet to an appropriate and manageable level will be an important further step towards tackling high inflation.

I expect these measures to contribute to an easing of inflationary pressures in the coming months, but further measures will probably be necessary this year to tighten monetary policy. Beyond this spring, my view on the appropriate pace of interest rate hikes and balance sheet shrinkage for this year and beyond will depend on how the economy plays out. I will focus particularly on the progress we are making in reducing inflation. My intention would be to take strong action to help reduce inflation, bringing it back toward our 2% target, while keeping the economy on track to continue creating jobs and economic opportunity for Americans.

I am pleased to have the opportunity to share with you this morning my views on monetary policy. But since we’re here to talk about community banking, let’s get back to this important topic. Before, but especially during the pandemic, we have seen an increased focus and urgency in integrating technology and innovation into community banking. The adoption of technology and innovation is really at the heart of the major challenges facing retail banks. We see banks, fintech companies, and technology companies exploring various technologies to improve their payment systems, expand consumer access, improve back-office operations, and create new financial products and services.

This interest and the growing interest in crypto and digital assets has created a need to work with the other federal banking agencies to give the industry better and more useful regulatory feedback as banks consider approaches to integrate asset-related activities. cryptographic and digital in their service offerings. Given the popularity of these types of assets and the growing interest of banks to participate in the market, there is a growing need for regulators to be able to engage with the industry on these issues.

The evolution of financial services, the emphasis on efficiency and speed of execution in the sector, and the rapid increase in technological advancements have also led the Federal Reserve to explore the potential benefits and risks of a currency. digital central bank (CBDC). We recently released a discussion paper as a first step to fostering broad and transparent public dialogue about CBDCs.3 The document is not intended to advance any specific policy outcome and no decision has been made at this time. We are truly committed to hearing a wide range of voices on this issue. The document was released earlier this year with a 120-day comment period. We encourage you to send us your comments and feedback, both generally and in response to specific questions posed in the document. As we engage in this process of dialogue and assessment, and throughout this initiative, I intend to keep an open mind about the usefulness and potential business case of a CBDC. I strongly encourage community bankers and all other stakeholders who would be affected by the creation of a CBDC to submit your comments and views to the Fed by May 20, the end of the scheduled public comment period.

Another area of ​​intense interest is the expansion of financial activities beyond the traditional structure of chartered banking institutions. We are seeing an increase in proposals for new types of charters being considered across the country. These changes, and the upcoming availability of the instant payment service Fed Now, have the potential to significantly alter the financial services landscape and market opportunities. In anticipation of this development, our Federal Reserve Banks are receiving an increased number of applications for membership and access to Reserve Bank principal accounts from institutions with these new charters. Recognizing the importance of clarity and transparency in this space, and to facilitate and assess these activities in a consistent manner, the Board is in the process of issuing clearer guidelines regarding the process for applying for and reviewing new bank charters. and access to accounts at the Federal Reserve. .

I look forward to discussing these and other questions with you in a few minutes, so I’ll stop there. It’s such a pleasure to be in person with you again at the ABA’s conference for community banks, and I look forward to chatting with you.

1. My views on the outlook and monetary policy are my own and do not necessarily reflect those of my colleagues on the Federal Open Market Committee. Return to text

2. Board of Governors of the Federal Reserve System, “Federal Reserve Issues FOMC Statement,” press release, January 26, 2022. Back to text

3. Board of Governors of the Federal Reserve System, “Money and Payments: The US Dollar in the Age of Digital Transformation” (January 2022). Return to text