Fed's Powell: Full Speech at Jackson Hole Symposium

Summary

The script discusses the economic impact of COVID-19 and subsequent recovery, highlighting the Federal Reserve's efforts to combat high inflation without causing significant unemployment. It details the challenges faced, including supply chain disruptions and labor market changes, and the importance of anchored inflation expectations. The Fed's proactive monetary policy adjustments and the economy's resilience are emphasized, with a focus on learning from the pandemic to inform future economic strategies.

Takeaways

• 📉 The economic distortions caused by the COVID-19 pandemic are receding, with inflation declining and labor market conditions easing.
• 💼 The Federal Open Market Committee (FOMC) has been focusing on reducing inflation while maintaining a robust labor market to avoid the unemployment spikes seen in previous disinflationary periods.
• 🌐 The pandemic's global impact led to supply chain disruptions and labor force shortages, contributing to inflationary pressures.
• 🛑 The initial spike in inflation was thought to be transitory and concentrated in certain goods, but it broadened and persisted, necessitating a monetary policy response.
• 🔄 The unwinding of pandemic-related supply and demand imbalances played a significant role in the decline of inflation.
• 💼📉 The labor market has cooled, with unemployment rising to 4.3%, reflecting a shift from an overheated state without significant layoffs.
• 💡 The anchoring of inflation expectations has been critical in facilitating disinflation without the need for economic slack.
• 🌟 The central bank's actions have reinforced the public's confidence in achieving the 2% inflation target over time.
• 🌍 The global nature of inflation during the pandemic was reminiscent of the 1970s, but unlike that period, inflation has been successfully managed without entrenching it.
• 📈 The current policy rate provides ample room for the central bank to respond to any risks, including further weakening in labor market conditions.
• 🔍 The pandemic has highlighted the need for ongoing review and adjustment of monetary policy strategies, with a commitment to learning from past experiences.

Q & A

What was the primary focus of the Federal Open Market Committee (FOMC) during the COVID-19 pandemic?

The primary focus of the FOMC was on bringing down inflation, as it had run well above their 2% goal for much of the past three years.

How has inflation changed since the peak of the pandemic?

Inflation has declined significantly since the peak of the pandemic, with prices having risen 2.5% over the past 12 months, according to the transcript.

What was the initial expectation regarding the rise in inflation after the pandemic?

The initial expectation was that the rise in inflation was transitory and would pass through fairly quickly without the need for a monetary policy response.

How did the labor market conditions evolve from the start of the pandemic to the time of the speech?

The labor market conditions were extremely tight at the start of the pandemic, but they have cooled considerably since then, with the unemployment rate rising to 4.3% and job gains slowing down.

What actions did the FOMC take to address the high inflation?

The FOMC raised the policy rate by 425 basis points in 2022 and another 100 basis points in 2023, and has held the policy rate at its current restrictive level since July 2023.

Why was there a significant surge in consumer spending on goods after the pandemic?

The surge was due to pent-up demand, stimulative policies, pandemic-induced changes in work and leisure practices, and additional savings from constrained services spending.

How did the pandemic affect the labor force and supply chains?

The pandemic led to 8 million people leaving the workforce initially, and supply chains were disrupted by lost workers, disrupted international trade, and shifts in demand composition and levels.

What was the role of inflation expectations in the recent economic events?

Anchored inflation expectations, reinforced by the central bank's actions, played a critical role in facilitating disinflation without the need for economic slack.

What is the current stance of the FOMC regarding monetary policy adjustments?

The FOMC is open to adjusting policy, with the direction clear and the timing and pace of rate cuts depending on incoming data, the evolving outlook, and the balance of risks.

What lessons can be learned from the pandemic regarding economic policy?

The pandemic has shown that anchored inflation expectations can facilitate disinflation without economic slack, and it has emphasized the importance of a flexible and learning-focused approach to economic policy.

How does the speaker view the future of the economy and inflation?

The speaker is optimistic that the economy will return to 2% inflation while maintaining a strong labor market, given the current policy rate and the progress made toward price stability.

Outlines

00:00

📉 Economic Recovery and Inflation Progress

The script discusses the economic landscape post-COVID-19, highlighting the significant decline in inflation and the cooling labor market. It emphasizes the Federal Open Market Committee's (FOMC) focus on reducing inflation without causing a sharp rise in unemployment, a strategy that has shown progress. The speaker outlines the current economic situation, the path for monetary policy, and reflects on the economic events since the pandemic, including the reasons behind the surge and subsequent decline in inflation.

05:01

📈 Understanding Inflation's Rise and Fall

This paragraph delves into the reasons behind the rise in inflation to unprecedented levels and its eventual decline, despite low unemployment rates. It discusses the impact of the COVID-19 pandemic on the economy, including government responses, consumer behavior changes, and supply chain disruptions. The paragraph also addresses the initial belief that the inflation spike was transitory and the subsequent realization that it required a monetary policy response to maintain well-anchored inflation expectations.

10:04

🌐 Global Impacts and Inflation Dynamics

The speaker examines the global nature of inflation, noting its widespread occurrence due to common experiences such as increased demand for goods, strained supply chains, and labor market tightness. The paragraph discusses the role of external shocks, such as Russia's invasion of Ukraine, and their contribution to inflation. It also explores the labor market's response to the pandemic, including the slow return of the workforce and the challenges of labor supply constraints, leading to a peak in inflation in 2022.

15:07

🛑 Disinflation and the Path to Stability

The final paragraph focuses on the decline of inflation without a significant increase in unemployment, attributing this to the unwinding of pandemic-related distortions and the effectiveness of restrictive monetary policy. It underscores the importance of anchored inflation expectations in facilitating disinflation and the central bank's commitment to price stability. The speaker concludes by reflecting on the uniqueness of the pandemic economy, the need for ongoing learning, and the upcoming review of the central bank's monetary policy strategy.

Keywords

💡Pandemic

A pandemic refers to an outbreak of a disease that occurs over a wide geographic area and affects an exceptionally high proportion of the population. In the context of the video, the COVID-19 pandemic caused significant economic distortions, leading to supply chain disruptions and labor market changes that influenced inflation and employment rates.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video discusses how inflation has declined significantly after the pandemic, with the speaker expressing confidence that it is on a sustainable path back to the 2% objective, as prices had risen 2.5% over the past 12 months.

💡Labor Market

The labor market encompasses the economic environment in which individuals seek employment and employers recruit staff. The script highlights the labor market's transition from being overheated to cooling considerably, with the unemployment rate rising to 4.3% and job vacancies falling, indicating less tight labor market conditions.

💡Monetary Policy

Monetary policy refers to the actions of a central bank, such as the Federal Reserve, intended to influence economic activity through the adjustment of the money supply and interest rates. The video script discusses the path ahead for monetary policy in the context of current economic conditions and the FOMC's focus on bringing down inflation.

💡Supply Constraints

Supply constraints occur when the supply of goods or services is unable to meet demand, often leading to price increases or shortages. The script mentions that supply constraints have normalized after the pandemic, contributing to the decline in inflation.

💡Disinflation

Disinflation is a reduction in the rate of inflation, or the decrease in the inflation rate over time. The video discusses the process of disinflation, emphasizing that it has occurred without a sharp rise in unemployment, which is historically unusual.

💡Unemployment Rate

The unemployment rate is the percentage of the labor force that is without jobs and actively seeking work. The script notes that the unemployment rate began to rise over a year ago and is now at 4.3%, reflecting a cooling labor market.

💡Asset Purchases

Asset purchases by a central bank, often in the form of government bonds, are a form of monetary policy to inject liquidity into the economy. The script mentions the phasing out of asset purchases as part of the monetary policy actions taken to combat inflation.

💡Inflation Expectations

Inflation expectations are the predictions about future inflation rates made by economic agents. The video emphasizes the importance of anchored inflation expectations in facilitating disinflation without the need for economic slack, highlighting the public's confidence in the central bank's commitment to achieving 2% inflation.

💡Policy Rate

The policy rate is the interest rate set by a country's central bank, influencing other interest rates in the economy. The script discusses the current level of the policy rate and how it provides ample room to respond to any risks, including further weakening in labor market conditions.

💡Economic Distortions

Economic distortions refer to disruptions or irregularities in the normal functioning of an economy. The script describes how the pandemic led to economic distortions, such as changes in consumer spending patterns and supply chain issues, which were significant drivers of high inflation.

Highlights

The worst of the pandemic-related economic distortions are fading with significant declines in inflation and normalized supply constraints.

Objective to restore price stability while maintaining a strong labor market, avoiding sharp increases in unemployment.

Progress has been made towards the economic goals, with inflation nearing the 2% target and labor market conditions easing.

Inflation expectations have been well anchored, supporting a restrictive monetary policy to balance aggregate supply and demand.

The labor market has cooled, with unemployment rising to 4.3%, reflecting a substantial increase in the supply of workers and a slowdown in hiring.

Job gains have slowed, and the labor market is no longer a source of elevated inflationary pressures.

Economic growth continues at a solid pace with evolving inflation and labor market data indicating diminishing upside risks to inflation and increased downside risks to employment.

Policy adjustments are necessary, with the direction clear and the timing and pace dependent on incoming data and the evolving outlook.

The current policy rate provides ample room to respond to any risks, including further weakening in labor market conditions.

Inflation rose due to pandemic-related factors and supply chain disruptions, but has since fallen significantly.

The initial burst of inflation was concentrated and related to goods in short supply, such as motor vehicles.

The transitory nature of inflation was initially expected, but the data turned against this hypothesis, indicating a need for a strong monetary policy response.

Global inflation was a phenomenon reflecting common experiences and challenges in supply chains and labor markets.

Inflation expectations remained anchored, facilitating disinflation without the need for economic slack.

The healing from pandemic distortions and efforts to moderate aggregate demand have put inflation on a sustainable path to the 2% objective.

Disinflation while preserving labor market strength is possible with anchored inflation expectations, reflecting public confidence in the central bank's commitment to 2% inflation.

The pandemic economy has been unlike any other, and there is much to be learned, emphasizing the need for humility and a questioning spirit in economic policy.

Transcripts

Four and a half years after a COVID 19 arrival, the worst of the pandemic

related economic distortions are fading. Inflation has declined significantly.

The labor market is no longer overheated and conditions are now less tight.

And those that prevailed before the pandemic supply constraints have

normalized, and the balance of risks to our two mandates has changed.

Our objective has been to restore price stability while maintaining a strong

labor market, avoiding the sharp increases in unemployment that

characterised earlier disinflationary episodes when inflation expectations

were less well anchored. While the task is not complete, we have

made a good deal of progress toward that outcome.

Today, I will begin by addressing the current economic situation and the path

ahead for monetary policy. I will then turn to a discussion of

economic events since the pandemic arrived.

Exploring why inflation rose to levels not seen in a generation and why it has

fallen so much while unemployment has remained low.

So let's begin with the current situation and the near term outlook for

policy. For much of the past three years,

inflation ran well above our 2% goal and labour market conditions were extremely

tight. The FOMC, whose primary focus has been

on bringing down inflation and appropriately so.

Prior to this episode, most Americans Alive today had not experienced the pain

of high inflation for a sustained period.

Inflation brought substantial, substantial hardship, especially for

those least able to meet the higher costs of essentials like food, housing

and transportation. High inflation triggered stress and a

sense of unfairness that linger today. A restrictive monetary policy helped

restore balance between aggregate supply and demand, easing inflationary

pressures and ensuring that inflation expectations remained well anchored.

Inflation is now much closer to our objective, with prices having risen 2.5%

over the past 12 months. After a pause earlier this year,

progress toward our 2% objective has resumed.

My confidence has grown that inflation is on a sustainable path back to 2%.

Turning to employment in the years just prior to the pandemic, we saw the

significant benefits to society that can come from a long period of strong labour

market conditions, low unemployment, high participation, historically low

racial employment gaps. And with inflation, low and stable,

healthy, real wage gains that were increasingly concentrated among those

with lower incomes. Today, the labor market has cooled

considerably from its formerly overheated state.

The unemployment rate began to rise over a year ago and is now at 4.3%, still low

by historical standards, but almost a full percentage point above its level in

early 2023. Most of that increase has come over the

past six months. So far, rising unemployment has not been

the result of elevated layoffs, as is typically the case in an economic

downturn. Rather, the increase mainly reflects a

substantial increase in the supply of workers and a slowdown from the

previously frantic pace of hiring. Even so, the cooling in labour market

conditions is unmistakable. Job gains remain solid but have slowed

this year. Job vacancies have fallen in, the ratio

of vacancies to unemployment has returned to its pre-pandemic range.

The hiring and quits rates are now below the levels that prevailed in 2018 and

19. Nominal wage gains have moderated.

And all told, labor market conditions are now less tight than just before the

pandemic. In 2019, a year when inflation ran below

2%. It seems unlikely that the labor market

will be a source of elevated inflationary pressures anytime soon.

We do not seek or welcome further cooling in labour market conditions.

Overall, the continued the economy continues to grow at a solid pace, but

the inflation and labour market data show an evolving situation.

The upside risks to inflation have diminished and the downside risks to

employment have increased. As we highlighted in our last FOMC

statement. We are attentive to the risks to both

sides of our dual mandate. The time has come for policy to adjust.

The direction of travel is clear and the timing and pace of rate cuts will depend

on incoming data, the evolving outlook and the balance of risks.

We will do everything we can to support a strong labor market as we make further

progress toward price stability. With an appropriate dialing back of

policy restraint. There is good reason to think that the

economy will get back to 2% inflation while maintaining a strong labor market.

The current level of our policy rate gives us ample room to respond to any

risks we may face, including the risk of unwelcome, further weakening in labour

market conditions. So let's now turn to the questions of

why inflation rose and why it has fallen so significantly, even as unemployment

has remained low. There's a growing body of research on

these questions, including Eggers and his work, which will shortly discuss.

And this is a good time for this discussion.

It is, of course, too soon to make definitive assessments.

This period will be analyzed and debated long after we are all gone.

The arrival of the COVID 19 pandemic led quickly to shutdowns in economies around

the world. It was a time of radical uncertainty and

severe downside risks as so often happens in times of crisis.

Americans adapted and innovated. Governments responded with extraordinary

force, especially in the United States. Congress unanimously passed the CARES

Act. At the Fed, we used our powers to an

unprecedented extent to stabilize the financial system and help stave off an

economic depression. After a historically deep but brief

recession. In mid 2020, the economy began to grow

again. And as the risks of a severe extended

downturn receded and as the economy reopened, we faced the risk of replaying

the painfully slow recovery that followed the global financial crisis.

Congress delivered substantial additional fiscal support in late 2020

and again in early 2021. Spending recovered strongly in the first

half of 2021, and the ongoing pandemic shaped the pattern of the recovery.

Lingering concerns over COVID weighed on spending on in-person services.

But pent up demand, stimulative policies, pandemic changes in work and

leisure practices, and the additional savings associated with constrained

services spending all contributed to a historic surge in consumer spending on

goods. The pandemic also wreaked havoc on

supply conditions. 8 million people left the workforce at

its onset, and the size of the labor force was still 4 million below its

pre-pandemic level in early 2021. The labor force would not return to its

pre-pandemic trend until mid 2023. Supply chains were snarled by a

combination of lost workers, disrupted international trade linkages and

tectonic shifts in the composition and level of demand.

Clearly, this was nothing like the slow recovery after the global financial

crisis. Enter inflation

after running below target through 2020. Inflation spiked in March and April

2021. The initial burst of inflation was

concentrated rather than broad based, with extremely large price increases for

goods in short supply such as motor vehicles.

My colleagues and I judged at the outset that these pandemic related factors

would not be persistent and thus that the sudden rise in inflation was likely

to pass through fairly quickly without the need for a monetary policy response.

In short, that the inflation would be transitory.

Standard thinking has long been that as long as inflation expectations remain

well anchored, it can be appropriate for central banks to look through a

temporary rise in inflation. The good ship Transitory was a crowded

one with most mainstream analysts and

advanced economy central bankers on board.

I think I see some former former shipmates out there today.

The common expectation was that supply conditions would improve reasonably

quickly. That the rapid recovery in demand would

run its course and that demand would rotate back from goods to services,

bringing inflation down. For a time, the data were consistent

with the transitory hypothesis. Monthly readings for core inflation

declined every month from April through September 2021.

Although progress came slower than expected.

The case began to weaken around mid-year, as was reflected in our

communications. And beginning in October, the data

turned hard against the transitory hypothesis.

Inflation rose and broadened out from goods to services, and it became clear

that high inflation was not transitory and that it would require a strong

response if inflation expectations were to remain well anchored.

We recognized that and pivoted. Beginning in November, financial

predictions began to tighten, and after phasing out our asset purchases, we

lifted off in March of 20, 2022. By early 2022, headline inflation

exceeded 6% and core was above 5%. New supply shocks appeared.

Russia's invasion of Ukraine led to a sharp increase in energy and commodity

prices. The improvements in supply conditions

and the rotation in demand from goods to services were taking much longer than

expected, in part due to further COVID waves in the United States.

And COVID continued to disrupt production globally, including through

new and extended lockdowns in China. Higher rates of inflation were a global

phenomenon, reflecting common experiences, rapid increases in the

demand for goods, strained supply chains, tight labour markets and sharp

hikes in commodity prices. The global nature of inflation was

unlike any period since the 1970s. Back then, inflation became entrenched,

an outcome we were utterly committed to avoiding.

By mid 2022, the labour market was extremely tight, with employment

increasing by six and a half million jobs from the middle of 2021.

This increase in labour demand was met in part by workers rejoining the labour

force as health concerns began to fade. But labour supply remained constrained

and in the summer of 2022, labour force participation remained well below

pre-pandemic levels. There were nearly twice as many job

openings as unemployed persons from March 2022 through the end of the year,

signalling a severe labour shortage and inflation peaked at 7.1% in June 2022.

At this podium. Two years ago, I discussed the

possibility that addressing inflation could bring some pain in the form of

higher unemployment and slower growth. Some argue that getting inflation under

control would require a recession and a lengthy period of high unemployment.

And I expressed our unconditional commitment to fully restoring price

stability and to keeping at it until the job is done.

The FOMC did not flinch from carrying out our responsibilities, and our

actions forcefully demonstrated our commitment to restoring price stability.

We raised our policy rate by 425 basis points in 2022 and another 100 basis

points in 2023. We've held our policy rate at its

current restricted level, restrictive level since July 2023.

The summer of 2022 proved to be the peak of inflation.

The four and a half percentage point decline in inflation from its peak two

years ago has occurred in a context of low unemployment, a welcome and

historically unusual result. So how did inflation fall without a

sharp rise in unemployment above its estimated natural rate?

Pandemic related distortions to supply and demand, as well as severe shocks to

energy and commodity markets, were important drivers of high inflation.

And the reversal has been a key part of the story of its decline.

The unwinding of these factors took much longer than expected, but ultimately

played a large role in the subsequent disinflation.

Our restrictive monetary policy contributed to a moderation in aggregate

demand, which combined with improvements in aggregate supply to reduce

inflationary pressures while allowing growth to continue at a healthy pace.

As labor demand also moderated, the historically high level of vacancies

relative to unemployment has normalized primarily through a decline in vacancies

without sizable and disruptive layoffs, bringing the labor market to a state

where is no longer a source of inflationary pressures.

A word on the critical importance of inflation expectations.

Standard economic models have long reflected the view that inflation will

return to its objective when product and labour markets are balanced without the

need for economic slack, so long as inflation expectations are anchored at

our objective. That's what the model said.

But the stability of longer run inflation expectations since the 2000s

had not been tested by a persistent burst of high inflation.

It was far from assured that the inflation anchor would hold.

Concerns over anchoring contributed to the view that disinflation would require

slack in the economy and specifically in the labour market.

An important takeaway from recent experience is that anchored inflation

expectations, reinforced by vigorous central bank actions, can facilitate

disinflation without the need for slack. This narrative attributes much of the

increase in inflation to an extraordinary collision between

overheated and temporarily distorted demand and constrained supply.

While researchers differ in their approaches and to some extent in their

conclusions, a consensus seems to be emerging, which I see as attributing

most of the rise in inflation to this collision.

All told, the healing from pandemic distortions.

Our efforts to moderate aggregate demand and the anchoring of expectations have

worked together to put inflation on what increasingly appears to be a sustainable

path to our 2% objective. Disinflation while preserving labour

market strength is only possible with anchored inflation expectations, which

reflect the public's confidence that the central bank will bring about 2%

inflation over time. That confidence has been built over

decades and reinforced by our actions. That is my assessment of events.

Your mileage may differ. So let me wrap up by emphasizing that

the pandemic economy has proved to be unlike any other and that there remains

much to be learned from this extraordinary period.

Our statement on longer run goals and monetary policy strategy emphasizes our

commitment to reviewing our principles and making appropriate adjustments

through a thorough public review every five years.

As we begin this process later this year.

We will be open to criticism and new ideas while preserving the strengths of

our framework, the limits of our knowledge so clearly evident during the

pandemic demand humility and a questioning spirit focused on learning

lessons from the past and applying them flexibly to our current challenges.

Thank you.