It’s a pleasure to join you today to discuss the role of central banks and financial regulators in effectively promoting a stable and resilient global financial system. Before I begin my remarks, let me first take a moment to express my deepest sympathies to those who have been impacted by last month’s earthquake. I especially wish to recognize the Moroccan authorities for their efforts to host this important gathering under such challenging circumstances. We are grateful for your determination and inspired by your resilience and hospitality.
Today, I will discuss some of the financial system vulnerabilities and risks that I see as most salient. These risks and vulnerabilities are top of my mind but are by no means exhaustive of those monitored by the Federal Reserve. I will then offer some thoughts on how the Federal Reserve, and other financial regulators and central banks, may be able to address and mitigate these financial system vulnerabilities and risks so that monetary policymakers are able to continue to pursue their monetary policy mandates.
The recent macroeconomic experience has presented both monetary policy and financial stability challenges for central banks. In many economies during the pandemic, supply chain disruptions coupled with strong demand as economies emerged from pandemic restrictions acted as catalysts pushing inflation up to very high levels. Aggregate demand was also supported by accommodative monetary and fiscal policies, which served to bolster the balance sheets of households, businesses, and local governments; increased excess savings; and contributed to very tight labor markets.
Many central banks facing these dynamics have tightened monetary policy in an effort to bring demand and supply into better balance and to bring inflation back down to their targets. In the United States, over the past year and a half, the Federal Open Market Committee (FOMC) has increased the federal funds target range by 5-1/4 percent and has been reducing the Federal Reserve’s securities holdings, which had increased substantially during the pandemic period. We have seen some progress on lowering inflation over that time. However, inflation remains well above the FOMC’s 2 percent target. Domestic spending has continued at a strong pace, and the labor market remains tight. This suggests that the policy rate may need to rise further and stay restrictive for some time to return inflation to the FOMC’s goal.