Fighting Inflation with Rate Hikes and Balance Sheet Reduction | Governor Christopher J. Waller | At the Economic Forecast Project, University of California, Santa Barbara, Santa Barbara, California |
Thank you Peter, and thank you to the UCSB Economic Forecast Project for the invitation to speak today. My plan is to start with my outlook for the U.S. economy in 2022, and then describe what I consider the appropriate path of monetary policy to keep the economy on a healthy and sustainable course.1 But, before I get into that discussion, let me comment on what I think is on everyone’s minds today, Russia’s attack on Ukraine. Obviously, there are people in harm’s way and we shouldn’t lose sight of them. It is far too early to judge how this conflict will affect the world, or the world economy, and what the implications will be for the U.S. economy. But this situation adds uncertainty to my outlook and will be something I will be monitoring very closely. As my speech will say, we will need to carefully look at the incoming data, especially during a time of heightened uncertainty.
Turning to my outlook for the economy, my greatest concern is continued elevated inflation. Inflation is too high, and I think concerted action is needed to rein it in. The Federal Open Market Committee (FOMC) has multiple tools to tighten monetary policy, and I will go into some detail about how I believe the Fed should approach increasing the target range for the federal funds rate and reducing the size of the balance sheet.
But let me start with the outlook for economic activity. I expect the economy to continue expanding at a healthy rate this year, slower than in 2021 but still at a solid pace that will keep employment growing strongly. While there are some signs that the effects of the Omicron variant have dampened economic growth in the last month or two, it does not appear to have affected hiring, given the healthy jobs report for January. Even COVID-sensitive sectors such as leisure and hospitality saw big job gains last month. With COVID cases dropping sharply, I expect this latest surge in infections will not be a major factor affecting the economy in 2022. Supply bottlenecks and labor shortages, some of them related to the pandemic, continue to weigh on economic output, but I expect those to diminish later this year.
The combination of strong consumer demand and supply constraints has produced very high inflation. The consumer price index (CPI) was up 7.5 percent for the 12 months through January, the highest yearly rate in 40 years. With appropriate monetary policy, and the expected easing in supply constraints, I am hopeful inflation will move down over the course of this year, even with the recent geopolitical developments. Nevertheless, the path of inflation is the biggest risk to my outlook.
As we move through this year, I can’t emphasize enough how much this outlook, and the appropriate stance of monetary policy, will be influenced by the data that we see about the performance of the economy. I know, I know. Saying you need to be data dependent is like saying you are for motherhood and apple pie—who would disagree? But in the current situation, it is urgently important to be data dependent. For example, like most people, I expected the Omicron surge would hammer job creation in January, but the data showed that this didn’t happen. The ups and downs in forecasts during the pandemic should be evidence enough that policy decisions this year, more than ever, will need to be guided by the data, and not by what past experience suggests should happen.2 Missouri, which is home for me, is the Show Me State, so if you want to know how my outlook will evolve, show me the data. With that in hand, I will evaluate the outlook with respect to the Fed’s dual mandate in determining the appropriate setting for monetary policy.
The Labor Market
Let’s start with where the economy stands with respect to maximum employment. In December, I said that we were “closing in” on this objective.3 Since then, the labor market has continued to strengthen. I now believe we have achieved the FOMC’s objective of maximum employment. So, what has changed and made me more certain about that?
A big factor was the jobs report for January, which included very strong data for that month, upward revisions for November and December, and revisions for all of 2021. What we learned from those changes was that a reported slowdown in job creation in the second half of the year never happened, and that in fact job creation was remarkably steady throughout the year, averaging 555,000 a month and never deviating very far from that trend. These revisions helped explain why we saw such large and steady declines over the year in the unemployment rate, which fell from 6.4 percent in January 2021 to 4 percent in January 2022, which happens to be the median of FOMC participants’ December estimates of the longer-run unemployment rate. Accounting for retirees leaving the workforce, I estimate that employment is close to the levels of February 2020, right before the pandemic shock hit the economy and when the target range for the federal funds rate was much higher than the current target range.
The January job numbers were just one monthly report, but one reason I have the confidence to declare that maximum employment has been reached is the message January sent about the durability of the continuing recovery. Based on recent data, including a big increase in retail sales in January, it sure looks like a very significant surge in COVID has failed to derail or even appreciably slow the economy. It has been hazardous to predict much about the economic effects of the pandemic more than a month or two out, but I’m comfortable saying we are at maximum employment in part because of the evidence that the labor market is continuing to strengthen.
Another message from the January report, including the revisions to each month of 2021, is that, so far at least, labor shortages do not seem to be having a huge effect on the economy’s capacity to create jobs. Job creation didn’t slow appreciably in November and December as originally reported; it actually was higher than the average for the rest of the year. Labor force participation isn’t growing as much as one would expect with the hot job market, but apparently it’s growing enough to keep the job creation machine humming.
Another factor that signals we are at maximum employment is the continued rise in measures of labor compensation. The broadest measure of labor compensation, covering wages and benefits, is the employment cost index, which for private sector workers rose at a 4.7 percent annual rate in October, November and December, the fastest pace in 20 years. Average hourly earnings also continue to grow more strongly than they have in decades, and the gains are widespread across sectors. Job vacancies also indicate labor demand is exceptionally strong with nearly 3 million more vacancies than individuals looking for work.
Inflation
While I will continue to watch data on the labor market, I am focusing most of my attention on inflation, which is far too high and needs to come down. In December, some people were a little surprised to hear me say that inflation was “alarmingly high,” but after the latest inflation numbers, I think we all should be alarmed. It is alarming because high inflation is especially painful for lower- and middle-income people, who don’t have a choice about paying more for gasoline, groceries, shelter, and other necessities. It is alarming because of the risk that high inflation could become ingrained in people’s expectations and prove difficult to rein in, undermining economic growth.
The 7.5 percent increase in the CPI in January came after a 7.1 percent increase in December. It was the 11th consecutive month that inflation exceeded 2 percent. The FOMC targets another measure of inflation, the price deflator for personal consumption expenditures (PCE), which will be reported tomorrow. But for both measures, inflation has been increasingly broad-based for quite some time. For the CPI, better than 70 percent of items measured are up 3 percent or more in the last 12 months, and for PCE inflation, 60 percent of items were up that much in December.
High inflation is a significant problem for individuals and families, and it makes it difficult for businesses to control costs and adjust prices. There is also the risk that the public’s expectations of future inflation rise significantly, which affects spending decisions in the short term and thus can have the effect of driving inflation even higher. Keeping longer-term inflation expectations anchored is vitally important for monetary policy. In fact, the FOMC’s Statement on Longer-Run Goals and Monetary Policy Strategy emphasizes that longer-term inflation expectations that are well anchored at 2 percent foster price stability and enhance the Committee’s ability to promote maximum employment in the face of significant economic disturbances.
Surveys of consumers’ expected inflation over the next year moved up quite notably through 2021 and are currently elevated. And the public’s expectations of inflation over the next five years have risen as well. That said, five-year inflation expectations are where they were over the past couple of decades when inflation stayed low. Importantly, longer-term expectations are much more stable. For example, future inflation measured by investors trading inflation-adjusted securities has 5-to10-year implied compensation around 2.2 percent, which, adjusted for the FOMC’s preferred measure, PCE, is close to 2 percent. In the same way that expectations of much higher inflation can drive a cycle of ever-increasing inflation, when expectations are “anchored” and don’t move significantly, it can have the effect of helping moderate surges in inflation, such as the one we have seen over the past year.
As for what inflation does next, I think anyone who makes a forecast has to own the fact that very few of us foresaw how much inflation would increase in 2021. We underestimated the extent to which supply constraints—from bottlenecks to labor supply shortages—and strong demand would drive up inflation, and we thought bottlenecks and shortages would begin to resolve sooner than now. I think we have a clearer idea today of the effect of those factors on inflation but going forward we need see how geopolitical effects influence energy, commodity, and other prices. With some humility, while I am alarmed about the level of inflation and a bit uncertain about how the near-term may play out, I am hopeful that these factors and their price effects are likely to ease in the second half of 2022 and that with appropriate monetary policy, inflation will be coming down significantly by year end.
I will be watching closely the data on supply pressures and how those feed into total consumer prices, and I’ll be monitoring carefully to see whether expectations rise out of a range that would suggest they are becoming unanchored. As I said earlier, it is too soon to know how Russia’s attack on Ukraine will affect the U.S. economy, and it may not be much easier by the time of our March meeting.
Appropriate Monetary Policy
Now let me spell out what my outlook implies for appropriate monetary policy over the course of 2022. Based on the inflation data in hand, I believe the Fed needs to act promptly to begin tightening monetary policy. As I said earlier, I believe that we have achieved our employment goal and that the labor market will keep improving, which means there should be no delay in responding to inflation that is significantly above our target.
The FOMC has already taken actions to end asset purchases in early March, and I believe that the recent inflation and jobs reports have made the case to begin raising the target range for the federal funds rate at our March FOMC meeting.
Based on my outlook, my preference is to increase the target range 100 basis points by the middle of this year. That is, I expect inflation to remain elevated and only show modest signs of deceleration over the next several months. As a result, I believe appropriate interest rate policy brings the target range up to 1 to 1.25 percent early in the summer. That would be a bit below where rates were at the outbreak of the pandemic, when inflation was considerably lower, and before we more than doubled the Fed’s balance sheet, so I consider this a necessary and prudent start to tightening policy.
The pace of tightening will depend on the data. One possibility is that the target range is raised 25 basis points at each of our next four meetings. But if, for example, tomorrow’s PCE inflation report for January, and jobs and CPI reports for February indicate that the economy is still running exceedingly hot, a strong case can be made for a 50-basis-point hike in March. In this state of the world, front-loading a 50-point hike would help convey the Committee’s determination to address high inflation, about which there should be no question. Of course, it is possible that the state of the world will be different in the wake of the Ukraine attack, and that may mean that a more modest tightening is appropriate, but that remains to be seen. With the economy at full employment and inflation far above target, we should signal that we are moving back to neutral at a fast pace based on the performance of the economy, and a 50-basis point hike would help do that. Consequently, should the data break against us in the coming weeks, we need to be prepared to hike the policy rate by 50-basis points.
No matter the near-term path of reducing accommodation, the FOMC must respond decisively to the data so as to maintain our credibility that we will bring down inflation. We constantly say we have the tools to fight inflation, and now we must demonstrate the will to use them.
While I believe that we should raise the target range by 1 percentage point over the next several months, I will be assessing the incoming data to decide whether further rate increases in 2022 are warranted and, if so, at what pace they should be implemented. If high inflation persists, then I would most likely support that we continue hiking, and potentially increase the pace of tightening. If inflation moderates in the second half of the year, as I expect, and as market participants expect, then we can slow the pace of tightening or even pause. As I said earlier—show me the data.
Turning to balance sheet policy, as I noted, the Committee has decided to end asset purchases in early March. Initially, we will be keeping the size of the Fed’s balance sheet constant by reinvesting the proceeds of maturing securities. The FOMC has not decided when to begin the reduction in the size of the balance sheet, but we issued a set of principles last month that make it clear that changing the target range of the federal funds rate is our principal monetary policy tool, and that balance sheet reductions through the “runoff” from maturing securities would commence after rate hikes have begun.
I support starting this process no later than the July FOMC meeting. The pace of the reduction in asset holdings has not been determined but will be consistent with promoting the FOMC’s employment and inflation goals and will be communicated well in advance to the public so that the plan is predictable.
The last time we reduced our balance sheet we did the following: First, we waited two years after our first-rate hike before commencing balance sheet runoff. Second, we imposed monthly caps on the amount of maturing securities that we would let run off. These caps started out very low and were gradually lifted over a period of 12 months. So, why not follow the same strategy this time?
First, back in 2017 and 2018 we had never intentionally reduced our balance sheet before. This was new territory for the Fed, so we went slow. Second, the Committee was considering moving to an ample reserves regime for conducting monetary policy, where we wanted to keep the banking system flush with reserves. Thus, we had no idea how far we could let reserves fall before we might cause an unwelcome shortage of reserves. Third, the economy was in a much different place; in particular inflation was much lower. Finally, we only expected to run off about $2 trillion of securities from our balance sheet. In that environment it made sense to go slow and gradual in terms of balance sheet reduction.
Fast forward to today. This is now the second time we have done balance sheet reduction and we learned from experience and can go faster than before. Policymakers and markets have a good understanding now of how the process works.
In terms of the appropriate size of the caps, I believe they can be larger than last time for several reasons. First, we have a very large balance sheet—securities holdings have increased $4.5 trillion since the start of the pandemic and the balance sheet is nearly $9 trillion. So even with a hefty reduction in holdings over the next year, we will still have a balance sheet that will be more than sufficiently large enough to conduct monetary policy. Second, the Fed’s overnight reverse repurchase agreement facility, put in place to help conduct monetary policy, receives a large amount of deposits each day. The daily average take-up of $1.6 trillion so far in 2022 tells me that there is tremendous excess liquidity in financial markets. Large redemption caps will assist in removing this excess liquidity. Third, we have learned a lot about operating in an ample reserves regime over the past decade. And we learned lessons from the 2019 experience in reducing reserves. In the first quarter of 2019 the ratio of reserves to nominal gross domestic product (GDP) was approximately 8 percent and financial markets worked well and banks were flush with liquidity. Right now, reserves are far more than ample, standing at 17 percent of GDP. When evidence suggests that we are getting closer to a more appropriate and sustainable level of reserves, we can slow the pace of redemptions. Finally, we have the newly established standing repurchase facility, which acts as a backstop to buffer any unexpected liquidity needs. This facility can help assist us with any unexpected bumps along the way.
With large caps and sizable amounts of securities maturing over the course of the next year or two, I do not see the need to consider asset sales anytime soon. However, because the Fed’s mortgage-backed securities (MBS) holdings have long maturities and are quite sizable, prepayments are unlikely to bring these holdings down to de minimis levels over the next decade. So, MBS sales could be something the Committee considers down the road to satisfy our balance sheet principles long run goal of holding primarily Treasury securities. But that is a conversation for another day. In the meantime, I would support having no caps on MBS redemptions so our MBS holdings decline as fast as prepayments allow, which would modestly assist in moving us toward an all-Treasury portfolio.
Thinking about possible monetary policy actions in 2022, I expect it will be a very fluid year. The Chair has said we will be nimble. I believe nimble describes how we acted in 2021 as well, when nimbleness and good communications served the FOMC well. Think back to the middle of 2021. Just last June, markets expected tapering to begin sometime in 2022, the majority of FOMC participants called for liftoff in 2023, and primary dealers surveyed in July by the Federal Reserve Bank of New York predicted a decline in the balance sheet wouldn’t start until the middle of 2025. Wow, how things have changed.
Over the course of the second half of last year, market expectations of the taper’s beginning quickly moved to November, and then a month after it started, markets predicted it would be completed this March. Soon after, markets were pricing liftoff in March, with several rate hikes over the course of 2022. And now markets are also focused on the start of the decline in the balance sheet sometime this year. It is interesting to note that these dramatic changes in actual and anticipated monetary policy have occurred without volatility or strain in financial markets. I believe the FOMC has been highly effective in communicating its shifting outlook for the economy and appropriate policy actions as the data revealed that inflation was increasing much more than forecasters expected.
Another point to make about the big changes in actual and anticipated monetary policy is that they are showing up in the financial data today. Financial conditions are tighter, I believe, because of the credible, forward guidance policymakers have communicated to the public. Although the Fed hasn’t started raising rates or reducing the balance sheet, interest rates have moved up notably. For example, the 2-year Treasury yield is more than 1 percentage point higher today than at the start of the third quarter of last year. The 10-year Treasury yield is up 1/2 percentage point, and the 30-year fixed mortgage rate is up about 1 percentage point over this period. Going forward, policymakers will adjust policy as needed, which will reinforce the Fed’s credibility.
Let me conclude by saying I hope my remarks today contribute to the Fed’s effective and credible communications. One message you should take away is that the course of policy is not pre-set, and the course I favor will be determined by my interpretation of new data. In the past couple months, inflation and employment data have been sending the same, unequivocal message—it is time to start tightening monetary policy. We need to take the first step in March to get off the effective lower bound. Then we should continue with hikes as well as begin to reduce our balance sheet. I will continue to monitor the geopolitical situation to assess the appropriate timing of this near-term monetary policy tightening. These actions will get us into the second half of the year, when we will have six months of inflation data, and we can assess what the appropriate path will be for the rest of 2022. Our goal is a soft landing for the economy that keeps output and employment growing at a healthy pace and inflation moving toward the FOMC’s 2 percent objective.
Compliments of the U.S. Federal Reserve.

1. These views are my own and do not represent any position of the Board of Governors or other Federal Reserve policymakers. Return to text

2. In December, I discussed lessons from the pandemic for economic forecasters, which included a review of forecasting misses for output and inflation. See Christopher J. Waller (2021), “A Hopeless and Imperative Endeavor: Lessons from the Pandemic for Economic Forecasters,” speech delivered at the Forecasters Club of New York, New York, December 17. Return to text

3. See Waller, “A Hopeless and Imperative Endeavor,” in note 2. Return to text

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The Commission outlines today the very substantial support the EU is making available to help people fleeing war in Ukraine, as well as the EU countries receiving them. In the face of Russia’s unprovoked and unjustified military invasion of Ukraine, European solidarity in action is helping people through direct humanitarian aid, emergency civil protection assistance, support at the border, as well as a clear legal status allowing those fleeing the war to receive immediate protection in the EU.
The assistance available includes:

Humanitarian support: As President von der Leyen has announced, €500 million from the EU budget is being directed to deal with the tragic humanitarian consequences of the war, both inside Ukraine and beyond. Of this, €90 million in humanitarian aid including €85 million for Ukraine and €5 million for Moldova, is already under way to provide food, as well as water, healthcare, shelter, and to help cover the basic needs of the most vulnerable. Through the largest ever activation of the EU Civil Protection Mechanism in response to an emergency, millions of items including vehicles, medical kits, tents, blankets, and sleeping bags have already reached those in need in Ukraine, while further assistance is delivered to neighbouring Moldova, Poland and Slovakia to support all those fleeing the war.

Support for border management: The Commission has issued operational guidelines to help Member States’ border guards in managing arrivals at the borders with Ukraine efficiently and reduce waiting time while maintaining a high level of security. EU agencies are also providing extra staff and expertise to support Member States, with for instance 49 Frontex staff deployed at EU-Ukraine and Moldova-Ukraine borders and an extra 162 staff being deployed to Romania. Moldova will also receive an additional €15 million to help manage the situation.

Protection for those fleeing and support for reception capacity: In record time the EU unanimously agreed to activate the Temporary Protection Directive to bring clarity and security to people in need, offering rights to welfare support, access to the job market and education. Central to this approach is the solidarity between Member States. A ‘Solidarity Platform’, where Member States can exchange information about reception capacity will be coordinated by the Commission. The Home Affairs funds for 2021-27 will also bring significant extra resources for Member States to ensure adequate reception facilities and effective asylum procedures. The Commission is also proposing to prolong the implementation period for the money available to Member States under the 2014-2020 Home Affairs funds, which would release around €420 million in additional support. The Commission will publish on the Europa website information to help citizens and the private sector ensure that their support to those fleeing the war can come through trusted organisations and match the needs.

Cohesion policy action for refugees in Europe: The Commission is also adopting the “Cohesion’s Action for Refugees in Europe” (CARE) legislative proposal. This will bring additional flexibility to finance a wide range of measures supporting people fleeing Ukraine, from the European Regional Development Fund (ERDF), the European Social Fund (ESF) and the Fund for the European Aid to the Most Deprived (FEAD). For example, these cohesion funds can be spent on investments in education, employment, housing, health and childcare services, and in the case of FEAD, on basic material assistance like food and clothing. To further support Member States, the exceptional 100% co-financing rate applied in response to the pandemic will be extended by a year. Moreover, around €10 billion from the 2022 Recovery Assistance for Cohesion and the Territories of Europe (‘REACT-EU’) funds is readily available and can also be used to finance actions to support those fleeing Ukraine.

Members of the College said:
High Representative/Vice President Josep Borrell said: “We are living the darkest times in Europe since World War II. Civilians are the first victims of Putin’s senseless war against Ukraine. The EU will support and protect those escaping Russia’s aggression – no matter their nationality, no matter where they come from. The EU will also mobilise all its tools to help those who host them.” 
Vice-President for Promoting out European Way of Life, Margaritis Schinas, said: “Visiting the borders, we witnessed incredibly moving scenes, with national officials, civil society and ordinary citizens coming to the aid of those arriving from Ukraine. The European Union is supporting these efforts with the full force and breadth of our instruments, personnel and funding. The activation of the temporary protection directive is an unequivocal and very tangible expression of support with those fleeing the war in Ukraine. And today we are mobilising additional funding to support Member States in this effort.”
Commissioner for Home Affairs, Ylva Johansson, said: “A welcome reprieve in these difficult times is the solidarity shown by Europeans and European Member States to people fleeing the war in Ukraine. I saw this spirit first hand in Siret, Romania and Medyka, Poland, but it is there across the EU. When we act together we act effectively – protecting people fleeing the war in Ukraine. This is Europe at its best: Providing the temporary protection needed and the funds to back it up.”
Commissioner for Crisis Management, Janez Lenarčič, said: “The biggest casualty of this brutal military aggression are innocent people living in Ukraine. The EU together with its Member States is working around the clock to bring emergency assistance in Ukraine and to countries directly affected by the influx of migrants. At the same time, we are providing lifesaving aid to our humanitarian partners on the ground to reach people in need. It is imperative that this aggression stops now as the humanitarian situation is getting critical with each passing day.”
Commissioner for Enlargement and Neighbourhood, Olivér Várhelyi, said: “With the Russian invasion of Ukraine, war has unfortunately returned to Europe and in these darkest hours we need to help Ukraine but also its neighbours who are affected. Our first emergency assistance is already being delivered. And we are, as part of €500 million, urgently preparing a package of €330 million to provide assistance to people both in Ukraine and those forced to flee, especially the children and the elderly. And we work on longer-term objectives, from energy security to economic recovery and resilience.”
Background
On 24 February, the Russian armed forces launched a large-scale invasion of Ukraine. As a result of this unprovoked and unjustified aggression, substantial areas of the Ukrainian territory now constitute areas of war from which many persons are fleeing. Through stepping up humanitarian assistance in Ukraine, as well as financial and operational support to Member States and Moldova, the EU and its Member States are providing protection for people fleeing war in Ukraine. The EU has also reacted swiftly and decisively to Russia’s aggression by adopting severe sanctions that will have massive consequences for Russia.
The EU will continue to stand united in its solidarity with Ukraine and its people. The Commission will continue providing support, including by ensuring the adequate level of preparation and a long-term focus on delivery in all Member States and Moldova to be ready to meet the needs as they evolve.
Compliments of the European Commission.
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WASHINGTON – Today, U.S. Secretary of the Treasury Janet L. Yellen released the following statement on President Biden’s executive order on digital assets.
“President Biden’s historic executive order calls for a coordinated and comprehensive approach to digital asset policy. This approach will support responsible innovation that could result in substantial benefits for the nation, consumers, and businesses. It will also address risks related to illicit finance, protecting consumers and investors, and preventing threats to the financial system and broader economy.
Under the executive order, Treasury will partner with interagency colleagues to produce a report on the future of money and payment systems. We’ll also convene the Financial Stability Oversight Council to evaluate the potential financial stability risks of digital assets and assess whether appropriate safeguards are in place. And, because the questions raised by digital assets often have important cross-border dimensions, we’ll work with our international partners to promote robust standards and a level playing field.
This work will complement ongoing efforts by Treasury. Already, the Department has worked with the President’s Working Group on Financial Markets, the FDIC, and OCC to study one particular kind of digital asset – stablecoins– and to make recommendations. Under the executive order, Treasury and interagency partners will build upon the recently published National Risk Assessments, which identify key illicit financing risks associated with digital assets.
As we take on this important work, we’ll be guided by consumer and investor protection groups, market participants, and other leading experts. Treasury will work to promote a fairer, more inclusive, and more efficient financial system, while building on our ongoing work to counter illicit finance, and prevent risks to financial stability and national security.”
Compliments of the U.S. Department of Treasury.
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“Check against delivery” | Paris, 7 March 2022 |
Introduction
Good morning. Thank you so much for inviting me to be with you today. I am glad to be here in person. Because getting together, being in one room  makes a difference.
This is especially true these days. The events of the past weeks are a watershed moment for us all. They alter the course of our policies and the calculus of our foreign relations.
I don’t want to say too much about it. But I do feel these events will galvanise us: As Europeans and as global citizens who believe in sovereignty, democracy and respect for international law, the unacceptable aggression of the Russian leadership, and the inspiring bravery and sacrifice of the Ukrainian people, unite us and reinforce our sense of purpose.
We need to strengthen our ability to stand up to illegal aggression. In addition to our determined support to Ukraine, we have taken coordinated action with like-minded partners to strengthen our sanctions against Moscow and Minsk.
Our sanctions are only effective because of the size and strength of our economy. And we will be able to handle the potential knock-on effects of these sanctions due to the resilience of our Single Market. This is why nurturing our Single Market is also investing in our capacity to act on the global stage.
Strengthening Resilience
With this in mind, our focus must continue to be the resilience of our economy – supporting innovation, making the most of the transition to the digital and green economy, and allowing businesses to compete and to scale-up on fair terms. In short, we need to make our Single Market stronger. This strengthening exercise has both an internal and an external dimension.
An example of internal strengthening is our upcoming Single Market Emergency Instrument, which is aimed at ensuring the functioning of the Single Market at all times. As we have been progressing out of the Covid crisis, little have we known that another, very different crisis would arrive at our doorstep. This shows the importance of crisis preparedness.
Then there is the external dimension. As part of our Industrial Strategy, we have been working with industry to identify strategic dependencies, and find durable solutions, so we don’t end up in a vulnerable position.
For semiconductors, such a solution is already in the pipeline. The European Chips Act will protect the Union against extreme dependency in this vital sector, by strengthening Europe’s position in research and chip production, and partnering with like-minded democracies to stabilise supply chains. Because, crisis or not, Europe cannot do it alone.
And let’s face it, the current events in Ukraine showed us what we already knew– that our strategic dependency on Russian gas makes our energy sector vulnerable in the short to medium term. It also give us yet another reason to intensify our commitment to the green energy transition.
The point is not to turn inwards. The point is that a greener, more diversified energy mix creates resilience, by giving us options. That same logic holds for all our work on competition policy. Whether in manufacturing, retail or financial services, we need open and dynamic markets to stay resilient.
Foreign Subsidies
This is also where our Foreign Subsidies Proposal comes in – it makes clear that distortive foreign subsidies will not be tolerated in the Single Market, while keeping the Union open to the foreign investment, innovation and global competition.
It empowers the Commission to take action against foreign subsidies granted to companies operating in our Single Market. Because such subsidies can distort the level playing field, we have been building for 60 years through our State aid control. This is not about protectionism; it’s about ‘fairness. Our proposal strikes a careful balance between effectiveness and the burden it creates. And it respects the balance between our own State aid rules and our international commitments, making sure everyone is treated fairly on the Single Market. It also makes sure that undistorted foreign investment can flow to Europe.
A targeted instrument as part of a wider approach
That said, for the instrument to work, it must remain targeted. There have been calls to broaden the scope to address aspects that go well beyond subsidies – things like lower labour law standards or environmental standards.
I don’t mean to say these issues are trivial. They are as important as they are complex. What does and does not constitute a ‘fair’ competitive advantage in trade between two very different countries, is a question trade policy has been concerned with for decades.
But the Foreign Subsidies Regulation cannot resolve all these issues. This is a Single Market instrument, and that is where its focus should be: on maintaining fair competition in the Single Market.
At the same time, this instrument will not exist in a vacuum. There are a number of other initiatives that deal with labour and environmental issues. For example, our new legislative instrument on due diligence in companies’ supply chains, or the Carbon Border Adjustment Mechanism to stop carbon leakage.
And the EU remains fully committed to supporting the multilateral framework, in particular the work of the World Trade Organisation. We also actively support fair and open trade through our bilateral and neighbourhood policies.
But we are also expanding our toolkit of instruments in support of a more assertive EU trade policy. These range from a screening mechanism for Foreign Direct Investment, to the proposals for an anti-coercion instrument and the International Procurement Instrument.
Conclusion
All the initiatives I have mentioned aim at making our Single Market more resilient, fairer and more assertive on the global stage. What I see, and which I find encouraging in these momentous times, is that we are strongly united behind this common goal.
The unprovoked aggression of the kind we are witnessing in Ukraine is a sign of weakness and desperation. We do right to show solidarity towards the Ukrainian people. We also do right by remaining strong and resolved in our principles; and in our commitment to fairness, to openness, and to peace.
Thank you.
Compliments of the European Commission.
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Today, the Commission is proposing to activate the Temporary Protection Directive  to offer quick and effective assistance to people fleeing the war in Ukraine. Under this proposal, those fleeing the war will be granted temporary protection in the EU, meaning that they will be given a residence permit, and they will have access to education and to the labour market.
At the same time, the Commission is also putting forward operational guidelines intended to help Member States’ border guards in managing arrivals at the borders with Ukraine efficiently, while maintaining a high level of security. The guidelines also recommend that Member States set up special emergency support lanes to channel humanitarian aid and recall the possibility of granting access to the EU on humanitarian grounds.
President of the European Commission, Ursula von der Leyen, said: “Europe stands by those in need of protection. All those fleeing Putin’s bombs are welcome in Europe.  We will provide protection to those seeking shelter and we will help those looking for a safe way home.”
Vice-President for Promoting our European Way of Life, Margaritis Schinas, said: “In a historically unprecedented move, the Commission is today proposing to grant immediate protection in the EU for those fleeing Ukraine. All those fleeing the war will be provided with a secure status and access to schools, medical care and work. At the same time, we are working to facilitate efficient crossings at the borders for people and their pets, with the necessary security checks. The times are bearing heavily down upon us but the European Union and every single one of its Member States is showing beyond a doubt that we are ready to step up to the plate and stand in solidarity with Ukraine.”
Commissioner for Home Affairs, Ylva Johansson, said: “I’m proud of how the EU and Member States are giving immediate support to those coming from the horrific threats of war. With our proposals today, we will give Member States further capacity to manage this crisis in an orderly and effective way. We will grant residency rights, labour market access and housing to people in need and finally with the guidelines we will make sure those fleeing the war in Ukraine can get to the EU quickly, without going through lengthy formalities at the borders.”
Temporary Protection Directive
Since the Russia’s military invasion of Ukraine, over 650,000 people have fled to neighbouring EU Member States. The Temporary Protection Directive was specifically conceived to give immediate protection to the persons who need it and to avoid overwhelming Member States’ asylum systems.
Under this proposal, Ukrainian nationals and people who have made Ukraine their home as well as their family members displaced by the conflict will be entitled to protection across the European Union. Non-Ukrainian nationals and stateless people legally residing in Ukraine who cannot return to their country or region of origin, such as asylum seekers or beneficiaries of international protection and their family members, will also be granted protection in the EU. Others who are legally present in Ukraine for a short-term and are able to return safely to their country of origins will fall outside the scope of this protection. Nevertheless, should be allowed access to the EU to transit prior to returning to their countries of origin.
Given the extraordinary and exceptional nature of this attack and the scale of new arrivals to the EU, the Temporary Protection Directive offers the appropriate response to the present situation by:

Providing immediate protection and rights: this includes residency rights, access to the labour market, access to housing, social welfare assistance, medical or other assistance, and means of subsistence. For unaccompanied children and teenagers, temporary protection confers right to legal guardianship and access to education.

Reducing pressure on national asylum systems by creating a protection status with reduced formalities. This will avoid overwhelming national asylum systems and allow the Member States to manage arrivals in an orderly and effective way in full respect for fundamental rights and international obligations.

Enhanced solidarity and responsibility sharing: The rules under the Temporary Protection Directive promote a balance of efforts between the Member States in hosting displaced persons from Ukraine. A ‘Solidarity Platform’, where Member States can exchange information about reception capacity will be coordinated by the Commission.

Further support from EU Agencies: Frontex, the European Union Asylum Agency and Europol can provide further operational support at the request of Member States to ensure smooth implementation of this decision.

Guidelines on border management
The guidelines on external border management clarify the facilitations available to Member States’ border guards under the Schengen rules in conducting border controls. This will help ensure efficient border management to help those fleeing the war find shelter without delay whilst maintaining a high level of security checks.
The facilitations available include:

Simplification of border controls at the EU’s borders with Ukraine: Under the Schengen rules, border guards can temporarily relax border checks in exceptional circumstances for certain categories of persons. The guidelines lay out criteria to help Member States decide whom this could apply to, addressing the needs ofvulnerable travellers such as children. Where the identity of the person arriving cannot be established, the regular border check should apply. In addition, Member States can also decide to perform border checks during or after the transport of the travellers to a safe location, and not at the border crossing point. These two measures will help reduce waiting time at the border so that people can reach a place of safety without delay.

Flexibility as regards entry conditions: Under the Schengen rules, border guards can authorise non-EU nationals to enter a Member State’s territory on humanitarian grounds even if they do not fulfil all entry conditions (for instance, even if they do not have a valid passport or visa with them). Member States could apply this derogation to allow entry to all those fleeing the conflict in Ukraine.

Allowing crossings at temporary border crossing points, outside official border crossing points: This could help reduce delays at the border in the current situation, for example in case the roads to official border crossing points are blocked by abandoned cars.

Easy access for rescue services and humanitarian assistance: Member States should make special arrangements to facilitate the entry and exit of rescue services, police and fire brigades, including to provide medical assistance, food and water to people waiting to cross the border. Member States should also set up special lanes at border crossing points to ensure access and return of organisations providing humanitarian assistance to people in Ukraine.

Personal belongings and pets: Those displaced from Ukraine can bring personal belongings without any customs duties. The guidelines also clarify the facilitations available for those coming with their pets.

The guidelines strongly recommend Member States make use of the support EU Agencies can provide – with Frontex able to assist on identifying and registering people arriving and Europol available to deploy officers supporting Member States with secondary checks.
Next Steps
It is for the Council to adopt the Temporary Protection proposal. The Council already expressed broad support for both measures at the extraordinary meeting of Sunday 27 February and has committed to discussing the two documents at the Justice and Home Affairs Council on Thursday, 3 March. Once adopted, temporary protection would start applying immediately and run for 1 year. This period is extended automatically by six monthly periods for a further year.
The Commission can propose at any time to the Council to end the temporary protection, based on the fact that the situation in Ukraine allows the safe and durable return of those granted temporary protection, or extend it, by one further year.*
The guidelines on external border management is a non-binding document intended to support border guards in their work. Member States’ border guards can immediately start making use of the clarifications it provides.
Background
Since the invasion of Ukraine by Russia, the EU is supporting the people of Ukraine. Through sanctioning Putin’s Russia and the Lukashenko regime in Belarus and stepping up its humanitarian support as well as financial and operational support to Member States, the EU and its Member States are providing a safe haven for people fleeing war in Ukraine.
Temporary protection is an exceptional measure to provide immediate and temporary protection to displaced persons from outside the EU and  unable to return to their country of origin.
The Schengen Borders Code – which sets the rules governing the crossing of the EU’s external borders and the entry conditions inside the EU for non-EU nationals – provides for flexibility in specific cases, to reduce formalities to a minimum in urgent crisis situations. Today’s guidelines clarify the possibilities and facilitations available to Member States’ border guards in managing the situation at the EU’s external borders with Ukraine.
Compliments of the European Commission.
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The Council today introduced further restrictive measures in view of the Russian Federation’s unprovoked and unjustified military aggression against Ukraine.
The Council decided in particular to prohibit:

the provision of specialised financial messaging services, which are used to exchange financial data (SWIFT), to Bank Otkritie, Novikombank, Promsvyazbank, Rossiya Bank, Sovcombank, VNESHECONOMBANK (VEB), and VTB BANK’. This prohibition will enter into force on the tenth day after the publication in the Official Journal of the EU, and will also apply to any legal person, entity or body established in Russia whose proprietary rights are directly or indirectly owned for more than 50% by the above-mentioned banks.
to invest, participate or otherwise contribute to future projects co-financed by the Russian Direct Investment Fund.

sell, supply, transfer or export euro denominated banknotes to Russia or to any natural or legal person, entity or body in Russia, including the government and the Central Bank of Russia, or for use in Russia.

Today’s decisions complements the package of measures announced by the High Representative after the video conference of EU Foreign Affairs Ministers of 27 February. Such package also includes the provision of equipment and supplies to the Ukrainian Armed Forces through the European Peace Facility, a ban on the overflight of EU airspace and on access to EU airports by Russian carriers of all kinds, a ban on the transactions with the Russian Central Bank, and the prohibition for state-owned media Russia Today and Sputnik’ to broadcast in the EU.
The European Union condemns in the strongest possible terms the Russian Federation’s unprovoked and unjustified military aggression against Ukraine, and demands that Russia immediately ceases its military actions, unconditionally withdraws all forces and military equipment from the entire territory of Ukraine and fully respects Ukraine’s territorial integrity, sovereignty and independence within its internationally recognised borders.
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The OECD has released the third batch of 2021/2022 updates to the transfer pricing country profiles, reflecting the current transfer pricing legislation and practices of 28 jurisdictions.
The updated country profiles add new information on countries’ legislations and practices regarding the transfer pricing aspects of financial transactions and the application of the Authorised OECD Approach (AOA) on the attribution of profits to permanent establishments. In addition, the country profiles reflect updated information on a number of transfer pricing aspects such as methods, comparability, intra-group services, cost contribution agreements, transfer pricing documentation and administrative approaches to prevent and resolve disputes.
In August and December 2021, the OECD had released the first and second batches of updated transfer pricing country profiles. With this third batch, the profiles for Brazil, Canada, Chile, China, Croatia, Dominican Republic, Estonia, Finland, Greece, Hungary, Israel, Korea, Liechtenstein, Lithuania, Luxembourg, Malta, Panama, Portugal, Slovenia, the United Kingdom, Uruguay and the United States have been updated, and 6 new country profiles from OECD/G20 Inclusive Framework on BEPS Members (Honduras, Iceland, Jamaica, Papua New Guinea, Senegal and Ukraine) were added, bringing the total number of countries covered to 91.
The OECD will continue to update existing transfer pricing country profiles to include new jurisdictions as changes in legislation or practice are submitted to the OECD Secretariat.
To access the latest transfer pricing country profiles, visit: https://oe.cd/transfer-pricing-country-profiles
Contact:

Manuel de los Santos, Acting Head of the Transfer Pricing Unit in the OECD Centre for Tax Policy and Administration | Manuel.DELOSSANTOS@oecd.org | +33 1 45 24 91 42 | ctp.communications@oecd.org

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From the President of the United States on the Trade Agreements Program | March 2022 |

Forward
The 2022 Trade Policy Agenda and 2021 Annual Report of the President of the United States on the Trade Agreements Program are submitted to the Congress pursuant to Section 163 of the Trade Act of 1974, as amended (19 U.S.C. § 2213). Chapter IV and Annex III of this document meet the requirements of Sections 122 and 124 of the Uruguay Round Agreements Act with respect to the World Trade Organization. This report includes an annex listing trade agreements entered into by the United States since 1984. This report also includes an annex on U.S. trade in 2021, for which goods trade data by country are for full year 2021 and full-year services data by country are for 2020 (latest data available). The Office of the United States Trade Representative (USTR) is responsible for the preparation of this document and gratefully acknowledges the contributions of all USTR staff to its writing and production. We note, in particular, the contributions of Mitchell Ginsburg, David Oliver, Russell Smith, and Spencer Smith. Appreciation is extended to partner Trade Policy Staff Committee agencies.
The President’s Trade policy Agenda
I. Introduction
The Biden Administration recognizes that trade can––and should––be a force for good. Done right, and in coordination with other policy disciplines, it can grow the middle class, redress inequality, and level the playing field by promoting fair competition. We remain committed to upholding a fair and open global trading system – one that follows through on our trading partners’ longstanding commitment to conduct economic relations with a view to raising standards of living, ensuring full employment, and promoting sustainable development.
To realize these goals, we must take stock of what has worked and what has not. This requires us to identify and rethink aspects of the existing trading system that incentivize or enable unfair competition.
Competition in a global market provides Americans access to a wider variety of goods and services at competitive prices. But, too often our existing global trade rules have rewarded advantages that are not based on fair competition – or American values more broadly. Consumers in the global marketplace are also wage earners and producers, and members of broader communities that feel the effects of our trade policies. A trade model that promotes exploitation, whether of workers or the environment, is not efficient – it is a form of unfair competition. And it is not sustainable.
For these reasons, the Administration continues to advance its worker-centered trade policy. We are standing up for workers’ rights – but it is more than that. We are promoting a broader agenda of fair competition to ensure that workers are competing on the basis of skills and creativity, not exploitative cost advantages. We are laser-focused on working with partners and allies to chart new trade rules that do more to advance decarbonization and other critical environmental standards, support U.S. farmers, promote sustainable and resilient supply chains, and combat the COVID-19 pandemic. Through this approach, we can harness fair competition and support the American middle class with increased prosperity while promoting core American values.
As President Biden has explained, “[We] will pursue new rules of global trade and economic growth that strive to level the playing field so that it’s not artificially tipped in favor of any one country at the expense of others, and every nation has a right and the opportunity to compete fairly.”
Exploitation of workers and the environment are not the only forms of unfair practices that distort global trade at the expense of Americans. We must recognize that China, as a large, non-market economy, has uniquely distorted global trade through its economic policies and practices, causing harm to U.S. production, investment, and even consumption. In many ways, China’s integration into the global trading system has highlighted weaknesses in the current system – and the urgent need for reform. Lack of protections for workers, a weak environmental regime, and anticompetitive subsidies are the hallmarks of China’s artificial comparative advantage. It is an advantage that puts others out of business and violates any notion of fair competition.
That’s why the Biden Administration is realigning our trade policies towards China to defend the interests of America’s workers and businesses to strengthen our middle-class, create shared sustainable growth, and spur resilient climate action. We are working to counter China’s unfair economic practices, including by raising our concerns directly with China and working with our partners and allies to address shared challenges.
We know we cannot effectively advance our worker-centered trade policy alone. Many of our partners and allies share our goal of a fairer, more sustainable international economic regime, and we are steadily forging the partnerships necessary to update and enforce the rules governing the global economy and trade. One example is the Administration’s success in rallying the world behind a Global Minimum Tax on corporations to address yet another race to the bottom that, among other things, has deprived the United States of resources that should rightfully allow for investment in communities here at home. Another is the deal we reached with the European Union (EU) to combat global oversupply in the steel and aluminum industry and negotiate a first-of-its-kind trade arrangement predicating market access on the greenhouse gas emissions of imported steel and aluminum. A third example is the agreements we reached with the EU and the UK to resolve the longstanding aircraft disputes involving Boeing and Airbus, which allowed us to move past a perennial irritant and focus on shared interests, including financing on market terms and the challenges posed by non-market economies. We are building on this momentum to advance broader goals of fair competition through all available avenues, whether bilateral, regional, or multilateral discussions; existing trade agreements and frameworks; or new initiatives. Where the scope of the challenge requires new tools, we will pursue them as well.
A vital element of our effort to build an inclusive trade policy agenda is understanding the effects of our policies on underrepresented and underserved workers and communities, and ensuring that they have a say in how our policies are designed going forward. A more inclusive framework will lead to more durable trade policy. Approaches to trade that rest on a narrow base of support are unsustainable, and could ultimately undermine U.S. leadership at a critical juncture. While our ambition is high, we are rising to the challenge.
Precisely because it is focused on workers as the engine of the global economy, the Biden Administration’s trade policy will be a force for good – and will lead to a more durable, stable, and resilient trading system.
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The United Nations Environment Assembly, meeting in Nairobi, has just agreed to launch negotiations on a legally binding global agreement to combat plastic pollution. EU diplomacy has played a key role in securing the support of the global community coming together in Nairobi for this agreement, which aims at reducing and eventually eliminating plastic pollution in all environments.
Executive Vice-President for the European Green Deal, Frans Timmermans said: “It is encouraging to see the global community come together at this time of crisis. Ever since the European plastics strategy was presented in 2018, the European Union has been a driving force to tackle plastic pollution. We are determined to keep pushing for ambitious global action, as the fight against the climate and biodiversity crises must involve all of us.” 
Speaking from Nairobi, Commissioner for Environment, Oceans and Fisheries Virginijus Sinkevičius welcomed the agreement: “About 11 million tonnes of plastic currently enter the ocean every year and this amount will triple in the next 20 years without an effective international response. Thus I am glad that with EU input the global community today stepped up to fight plastics pollution. We will engage actively in the discussions of a legally binding agreement that looks at all stages of the plastics life cycle from product design to waste.” 
The future agreement will aim to close the gaps that existing initiatives and agreements do not address, especially at the design and production phases of the plastics life cycle. It should bring together all stakeholders to achieve the overall goal to eliminate the leakage of plastic into the environment. The EU has put significant efforts throughout the years in outreach activities, working with partners and building support for a legally binding global agreement on plastics. The EU played a key role in bringing together the coalition of countries that spearheaded efforts towards today’s decision in Nairobi. 
Key steps towards a global agreement on plastics
As outlined in the European Green Deal and the Circular Economy Action Plan, the EU has emphasised the need for circular, life-cycle approach to plastics as a basis for a new legally binding global agreement. The solution lies in prevention, proper design and production of plastics, and their resource-efficient use, followed by sound management when it becomes waste. Commissioner Sinkevičius advocated this approach as a global priority in Nairobi.
The EU and its Member States believe that a global instrument needs to promote action at the national, regional and global levels and in particular enable countries to adopt implementation policies according to national specific circumstances, while applying a circular approach to plastics.
The future agreement could further identify the need for standards as well as measurable goals, and strengthen monitoring of plastic pollution, including marine plastic pollution, and assessment of their impacts in all environmental compartments. This would enable the adjustment of measures, both at the national and regional specific levels.
Next steps
The decision mandates the holding of the first session of the Intergovernmental Negotiating Committee in the second semester of 2022 and establishes the ambition to conclude negotiations by 2024. The EU will continue to work with its allies and other partners aiming at a rapid conclusion of the negotiations.
Background
Plastics can be a threat to the health and the environment if not treated properly. Approximately 300 million tonnes of plastic waste (an amount equivalent to the weight of the human population) are produced every year. However, only 9% is recycled; the vast majority of the rest accumulates in landfills or the natural environment. Over time, these materials break down into microplastics that ease additional pollutants into the human food chain, freshwater systems, and air.
Even with all commitments, efforts and actions that countries and regions are taking today, the world would see a limited reduction of plastic discharge into the oceans, of only 7% annually within 2040, if we continue with business as usual.
Despite a global momentum around the problem of plastic pollution, there is no dedicated international agreement specifically designed to prevent plastic pollution throughout the plastics lifecycle. The absence of agreed global response has hampered the ability of countries to implement effective measures, particularly those with trade implications and/or related to product standards. 
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