![handle is hein.crs/goveeeh0001 and id is 1 raw text is: Congressional
~.Research Service
Why Hasn't the Federal Reserve Tightened
Monetary Policy in Response to Higher
Inflation?
August 2, 2021
Inflation (the rise in the price of goods and services) has been unusually high in recent months, reaching
4% as measured by the personal consumption expenditures index (PCE) over the 12 months ending in
June 2021. For more information, see CRS Insight IN11644, Is High Inflation a Risk in 2021?, by Mark P
Keightley, Marc Labonte, and Lida R. Weinstock.
The Federal Reserve has a statutory mandate to achieve maximum employment and stable prices, which
the Fed defines as 2% inflation as measured by the PCE. The Fed implemented monetary stimulus in
response to the deep decline in economic activity caused by the COVID-19 pandemic, including reducing
interest rates to near zero and purchasing trillions of dollars of assets, popularly referred to as
quantitative easing. For more information, see CRS Report R46411, The Federal Reserve's Response to
COVID-19: Policy Issues, by Marc Labonte.
Higher inflation creates a conflict in how the Fed should approach its two statutoy goals-it could
tighten policy in response to higher inflation or maintain stimulus to address the employment shortfall.
The Fed has signaled that it does not intend to withdraw monetary stimulus in the near term. In July 2021,
it stated that it did not intend to raise interest rates above zero until labor market conditions have reached
levels consistent with the Committee's assessments of maximum employment and inflation ... [and] is on
track to moderately exceed 2 percent for some time and also that it would not reduce its asset purchases
for the time being.
Rationales for Maintaining Stimulus
There are several reasons the Fed believes that maintaining current stimulus is necessary. First,
employment-almost 7 million below its pre-pandemic level-is still below what the Fed believes
maximum employment to be. Second, the pandemic, in the midst of the Delta variant surge, still poses
risks to the economic recovery. Third, the inflation measure the Fed focuses on in the short term, core
PCE, is closer to the Fed's target than the measure the media typically focuses on-the headline
consumer price index, which is currently about two percentage points higher. Fourth, although higher
Congressional Research Service
https://crsreports.congress.gov
IN11715
CRS INSIGHT
Prepared for Membersand
Committeesof Congress](ViewImageLocal?handle=hein.crs/goveeeh0001&div=1&collection=&method=preview&ext=.png&size=3)
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