March 2022 National Economic Outlook

Job Market Recovery Continues, But Decades-High Inflation Is Pushing Fed to Raise Interest Rates

Executive Summary

The U.S. economy added 678,000 jobs in February, according to a survey of employers from the Bureau of Labor Statistics. This was the best month for job growth since July 2021. There was a combined upward revision to job growth in December and January of 92,000, and the three-month moving average of job growth through February was an excellent 580,000, close to the pace of the past year. 

Employment in February was 2.1 million, or 1.3%, below its pre-pandemic level. The U.S. economy has added back about 20 million of the 22 million jobs lost in March and April 2020 at the start of the pandemic. The unemployment rate fell to 3.8% in February from 4.0% in January, a new post-pandemic low. The unemployment rate was at 3.5% in early 2020 before the pandemic, and then rose to 14.7% in April of 2020.

Inflation in February accelerated to the fastest year-over-year pace in decades, as measured by the personal consumption expenditures price index from the Bureau of Economic Analysis. Overall consumer prices were up 6.4% in February from one year earlier, compared to 6.0% inflation in January. 

For core inflation, excluding food and energy, year-over-year inflation was 5.4% in February, up from 5.2% in January. This was the fastest overall inflation since early 1981, and the fastest core inflation since early 1983. The PCE price indices, particularly the core index, are the Federal Reserve’s preferred inflation measures.

With inflation running well above the Federal Reserve’s 2% long-run objective, the central bank has started to tighten monetary policy. On March 16 the Federal Committee raised the federal funds rate by a quarter of a percentage point, to a range of 0.25% to 0.50%. This was the first increase in the fed funds rate since late 2018.

The statement also said that the FOMC “anticipates that ongoing increases in the target range will be appropriate.” The statement also said that with appropriate monetary policy, inflation should “return to its 2 percent objective and the labor market [should] remain strong.” 

The FOMC also said that it “expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.”

The Fed had been purchasing long-term Treasurys and mortgage-backed securities to push down long-term borrowing costs and support the economic recovery from the pandemic; it has now wrapped up those purchases. The FOMC will start to reduce the size of the central bank’s balance sheet sometime over the next few months, at first by not replacing maturing securities.

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