By Howard Schneider
WASHINGTON (Reuters) – The Federal Reserve is “perfectly aware” of the challenges high inflation poses to the economy and is “strongly committed” to its 2% inflation target, the U.S. central bank said on Friday in its most recent semi-annual report to the US Congress on monetary policy and the US economy.
While largely a retrospective summary of recent economic events and the Fed’s policy meetings, the report offered some indications that the central bank expects consumer spending growth – which has been at a strong pace so far – decline as the year progresses and households spend savings built up during the pandemic.
“The fundamental (aspects) of household spending… appear to be somewhat less supportive of spending growth,” the report said. The document highlighted that even as wages rose at a robust pace, the influence of rising prices and the end of the pandemic and other transfer payments meant that after-tax income adjusted for inflation declined by 1.4% in 2022.
Consumer confidence “remains very low,” the report said.
But overall, the report reiterated the themes that now dominate the Fed’s debate: an “extremely tight” job market where workers remain in short supply, economic growth that likely needs to slow further to moderate pricing pressures, a financial sector that absorbed interest rate increases largely without problems and inflation that, despite everything, remains “well above” the Fed’s target.
The report, a central bank staff document that is not intended to provide guidance on future monetary policy, pointed to several points where tighter financial conditions are starting to have an impact, and others where the roots of a slowdown could be seen.
Commercial lending by banks grew during 2022 “but slowed down in the fourth quarter,” the report found. “Some indicators of future corporate defaults are somewhat high.”
Default rates on household loans were on the rise and mortgage issuance “continued to decline materially” on higher borrowing costs.
The document also signaled how issues that emerged during the pandemic, such as lower workforce participation, could be the new normal for the US.
While the impact of the pandemic itself on the workforce has eased and immigration has recovered somewhat, the report said a quick fix to the current labor shortage should not be expected.
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