WASHINGTON, March 3 (Reuters) - The U.S. Federal Reserve is "acutely aware" of the challenges high inflation poses to the economy and is "strongly committed" to its 2% target for price increases, the central bank said on Friday in its latest semiannual report to Congress on monetary policy and the economy.
While largely a backward-looking summary of recent economic developments and Fed policy meetings, the report nonetheless offered some indication that the central bank expects consumer spending growth - robust to now - to ease as the year progresses and households burn through savings accumulated during the pandemic.
"The fundamentals for household spending...appear to be somewhat less supportive of spending growth," the report said, noting that even with wages increasing at a robust pace, the influence of rising prices and the end of pandemic and other transfer payments meant that inflation-adjusted after-tax income declined 1.4% in 2022.
Consumer sentiment "remains very low," the report stated.
But overall the report reiterated the themes that now dominate Fed debate: an "extremely tight" labor market where workers remain in short supply, economic growth that likely needs to slow further to temper price hikes, a financial system that has absorbed rate increases largely without trouble, and inflation that, through it all, remains "well above the Federal Open Market Committee's objective."
"In response...the FOMC continued to rapidly increase interest rates and reduce its securities holdings," the report said, and also "anticipates that ongoing increases in the target range will be appropriate."
Fed Chair Jerome Powell will discuss the report and Fed policy in back-to-back congressional hearings next week, appearing at 10 a.m. EST Tuesday before the Senate Banking Committee and Wednesday at 10 a.m. before the House Financial Services Committee.
It will be Powell's first testimony since the Republican party took control of the House after the November midterm elections.
The chair's testimony and responses to questions from lawmakers often provide more of a glimpse into where the Fed is heading, and that may be particularly true next week following recent data that showed inflation was not slowing as fast as hoped. Indeed recent data has prompted some of Powell's colleagues to wonder why the Fed's rapid rate increases have not had more of an impact, and whether the central bank may have to raise interest rates even higher as a result.
The report, a staff document not intended to provide guidance about future policy, pointed to several spots where tighter financial conditions were arguably starting to have an impact, and others where the roots of a slowdown might be seen.
Business loans by banks grew through 2022 "but decelerated in the fourth quarter," the report said. "Some indicators of future business defaults are somewhat elevated."
Household loan delinquency rates were rising, and mortgage issuance "continued to decline materially" in the face of higher borrowing costs.
It also flagged how issues that came to the fore during the pandemic, like lower labor force participation, may prove to be the new normal for the U.S.
A rise in retirements, already suppressing the labor force by about 2.2 million potential workers, shows no signs of reversing.
Though the impact of the pandemic itself on the labor force has eased, and immigration has rebounded somewhat, the report said don't expect a quick fix to ongoing labor shortages.
"Due to the aging of the population, a meaningful reversal of the run-up in the retired share of the population seems unlikely," the report stated. "The labor force participation rate is likely to remain well below its level from before the pandemic."
