Federal Reserve Chairman Jerome Powell acknowledged on Tuesday that the Federal Reserve was wrong about the pandemic and its economic effects last year.
The Fed’s mantra for nearly two years has been that “the path of the economy” would depend on “the course of the virus.” Yet economic growth was far more robust than Fed officials thought, even as vaccinations were far less effective at lowering infections than predicted.
The U.S. economy, in other words, did not follow the path that the course of the virus seemed to indicate.
“What’s happened is the economy has made all the gains in the face of two…during 2021, we had two major pandemic variant outbreaks. And really the beginning of 2021 was dominated by a very strong wave of the original covid. And yet the economy, we made tremendous progress in the labor market in 2021 and growth is at a multi-decade high in 2021,” Powell said at his confirmation hearing before the Senate Banking Committee. “I expect the economy to be able to deal with these outbreaks.”
Powell said that he expected the development of vaccines would get the economy past the pandemic, acknowledging that the surge of infections in recent weeks caught him offguard.
“If you go back and look at where we were a year ago today in the economy, vaccines were arriving. In my thinking, there was the idea that will really help us get past the pandemic. It has helped a lot yet we’re at all time record cases and approaching record hospitalizations nationally. So the thing has stayed with us longer. I think we’re going to have to stay open to the changing environment and monetary policy is going to have to adapt as we learn more,” Powell said.
Powell now believes that the Fed has achieved its goals for a stronger labor market and inflation averaging close to its two percent target, so the aggressive stimulus deployed over the past two years is no longer appropriate.
“We’re at a place where unemployment is now very low, historically low, and inflation is well above target, and the economy no longer needs this very highly accommodative stance of policy. And I would expect that this year, 2022, will be a year in which we take steps toward normalization. That will involve raising the Federal Funds rate. That will involve ending asset purchases in March and perhaps later this year, depending on the run of things, we would also see ourselves beginning to allow the balance sheet to shrink,” Powell said.