Michelle W Bowman: Perspectives on US monetary policy and bank capital reform

I would like to thank Policy Exchange for the invitation to speak with you today. Engagement abroad is essential for gaining a better understanding of the common forces shaping the global economy and financial system. It also promotes a better understanding of the drivers of differences between the economic and financial environments across countries and jurisdictions. My remarks will offer some perspectives on recent developments in monetary policy and bank regulatory policy-specifically, bank capital reform-in the U.S. These are two areas in which I am actively engaged as a member of the Board of Governors of the Federal Reserve System.

Monetary Policy

I'll begin with monetary policy. The Federal Open Market Committee (FOMC)-the monetary policymaking body of the Federal Reserve System-has been keenly focused on restoring price stability following the surge in inflation during 2021 and in 2022 in the aftermath of the global COVID-19 pandemic. During this time, inflation reached levels not seen in the U.S. since the 1970s and 1980s. The high inflation experienced in the U.S. in the wake of the pandemic was also experienced in many economies around the world, reflecting, in part, the common global nature of the shocks that occurred during the COVID-19 pandemic.

In many economies during the pandemic, supply constraints related to social-distancing measures, reduced labor supply, and supply chain disruptions, coupled with strong demand for goods 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, and contributed to very tight labor markets.

The global inflation experience since the pandemic was highly synchronized across the major world economies, reflecting similar shocks that acted to reduce supply, while fiscal and monetary policy interventions stimulated demand. Early in the pandemic, many economic sectors, especially in services, were affected by lockdowns and both mandatory and voluntary social distancing. Many workers also transitioned to working remotely. Aggressive fiscal policies helped support personal and business income, and monetary policy became highly accommodative. The large shift in the composition of demand toward goods resulted in rising supply bottlenecks and higher goods prices.