Jackson Hole Symposium Federal Reserve Chair Jerome Powell’s remarks

Summary

The Federal Reserve Chair addresses the Jackson Hole Economic Symposium, reflecting on the journey from the pandemic's economic distortions to the current situation. With inflation declining and the labor market cooling, the focus has been on restoring price stability without causing unemployment spikes. The Chair discusses the challenges of high inflation, the role of anchored inflation expectations, and the importance of the central bank's actions in guiding the economy towards a sustainable 2% inflation rate.

Takeaways

• 📅 The Federal Reserve Bank of Kansas City's Jackson Hole Economic Symposium is focused on reassessing the effectiveness and transmission of monetary policy, a crucial topic in the current economic climate.
• 💼 Federal Reserve Chair J Pal delivered opening remarks, reflecting on the economic situation post-COVID-19 and the progress made toward restoring price stability and a strong labor market.
• 📉 Inflation has declined significantly since the pandemic's peak, with the labor market no longer overheated and conditions less tight than pre-pandemic times, indicating a shift in the balance of risks to the Fed's mandates.
• 💹 The Federal Open Market Committee (FOMC) has been focused on reducing inflation, which had run well above the 2% target, and has made progress with prices rising only 2.5% over the past 12 months.
• 📈 Despite the unemployment rate rising to 4.3%, the labor market remains strong, with most of the increase in unemployment reflecting a rise in the supply of workers and a slowdown in hiring rather than layoffs.
• 🛑 The FOMC has adjusted its policy direction in response to the evolving economic situation, with the timing and pace of rate cuts to be determined by incoming data and the balance of risks.
• 🌐 The COVID-19 pandemic caused global economic shutdowns and uncertainty, leading to extraordinary policy responses to stabilize financial systems and prevent economic depression.
• 🚀 There was a historic surge in consumer spending on goods during the pandemic, driven by pent-up demand, stimulus policies, and changes in work and leisure practices.
• 🔄 The pandemic disrupted supply chains and labor force participation, contributing to a collision of overheated demand and constrained supply, which was a key driver of high inflation.
• 🛑 Central banks, including the Fed, took strong action to anchor inflation expectations and avoid entrenched high inflation, which required substantial increases in policy rates.
• 🔑 Anchored inflation expectations, reinforced by central bank actions, have been critical in facilitating disinflation without the need for economic slack, preserving labor market strength.
• 🔍 The Fed is committed to reviewing its monetary policy strategy and principles every five years, embracing a learning mindset to apply lessons from the pandemic to current challenges.

Q & A

What is the main topic of the Federal Reserve Bank of Kansas City Jackson Hall economic Symposium?

The main topic of the Symposium is reassessing the effectiveness and transmission of monetary policy.

Who is the moderator for the day's sessions at the Symposium?

Karen Dinan is the moderator for the day's sessions at the Symposium.

What is the current status of inflation according to the Federal Reserve Chair?

Inflation has declined significantly and is now much closer to the 2% objective, with prices having risen 2.5% over the past 12 months.

What was the Federal Open Market Committee's (FOMC) primary focus prior to the current economic situation?

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

How has the labor market changed since the peak of the pandemic?

The labor market has cooled considerably from its formerly overheated state, with the unemployment rate rising to 4.3% and job gains slowing down.

What was the initial response to the COVID-19 pandemic in terms of monetary policy?

The Federal Reserve used its powers to an unprecedented extent to stabilize the financial system and prevent an economic depression.

Why was there an initial belief that the rise in inflation was transitory?

The belief was based on the expectation that supply conditions would improve quickly and that the rapid recovery in demand would run its course, leading to a rotation back from goods to services and bringing inflation down.

What factors contributed to the rise in inflation during the pandemic?

Factors included pent-up demand, stimulus policies, pandemic changes in work and leisure practices, additional savings from constrained services spending, and disruptions to supply chains due to lost workers and international trade linkages.

How did the Federal Reserve respond to the realization that inflation was not transitory?

The Federal Reserve pivoted in November 2021, tightening financial conditions, phasing out asset purchases, and raising the policy rate in March 2022.

What is the current stance of the Federal Reserve on adjusting monetary policy?

The Federal Reserve is attentive to the risks on both sides of its dual mandate and is ready to adjust policy, with the direction of travel clear and the timing and pace of rate cuts depending on incoming data and the evolving outlook.

What role did inflation expectations play during the period of high inflation?

Anchored inflation expectations, reinforced by the Federal Reserve's actions, facilitated the reduction in inflation without the need for economic slack, demonstrating the public's confidence in the central bank's commitment to achieving 2% inflation over time.

Outlines

00:00

📈 Economic Recovery and Monetary Policy

Karen Dinan introduces the first day of sessions at the Federal Reserve Bank of Kansas City's Jackson Hall economic Symposium, emphasizing the importance of reassessing monetary policy's effectiveness and transmission. Federal Reserve Chair J Pal delivers opening remarks, discussing the economic situation post-COVID-19, highlighting the decline in inflation, normalization of supply constraints, and the current labor market conditions. Pal outlines the progress made towards restoring price stability and maintaining a strong labor market, avoiding the sharp increases in unemployment seen in past disinflationary episodes. The speech also covers the current economic situation, inflation trends, and the Federal Open Market Committee's (FOMC) focus on bringing down inflation while considering the labor market's health.

05:00

📉 Inflation and Labor Market Dynamics

The second paragraph delves into the specifics of the labor market's cooling and the slowdown in job gains. Despite this, job vacancies have decreased, and the ratio of vacancies to unemployment has returned to pre-pandemic levels. The narrative shifts to discuss the broader economic context, including the growth of the economy, evolving inflation and labor market data, and the changing risks to inflation and employment. Pal outlines the FOMC's approach to policy adjustments, emphasizing the importance of incoming data and the evolving outlook. The discussion also touches on the reasons behind the rise and subsequent fall of inflation, the impact of the COVID-19 pandemic, and the role of fiscal and monetary policies in shaping the economic recovery.

10:01

🌐 Global Inflation and Supply Chain Disruptions

This section focuses on the global nature of inflation and the various factors that contributed to its rise and fall. It discusses the initial burst of inflation being concentrated in certain goods and the expectation that supply conditions would improve. However, the data began to contradict the 'transitory' hypothesis as inflation persisted and broadened to services. The paragraph also addresses new supply shocks, such as Russia's invasion of Ukraine, which increased energy and commodity prices. The discussion highlights the global phenomenon of high inflation, the impact of rapid demand increases on strained supply chains, and the central bank's commitment to avoiding entrenched high inflation.

15:01

🔗 Anchored Inflation Expectations and Economic Outlook

The final paragraph emphasizes the critical role of anchored inflation expectations in facilitating disinflation without economic slack. It discusses the extraordinary collision between overheated demand and constrained supply as the main driver of inflation, and how the unwinding of these factors contributed to its decline. The paragraph also highlights the importance of the central bank's actions in reinforcing confidence in achieving 2% inflation over time. Pal concludes by acknowledging the uniqueness of the pandemic economy, the lessons learned, and the commitment to reviewing and adjusting monetary policy principles through a thorough public review process.

Keywords

💡Monetary Policy

Monetary policy refers to the actions of a central bank, such as the Federal Reserve, aimed at influencing the economy through the management of interest rates and money supply. In the video, the discussion revolves around reassessing the effectiveness and transmission of monetary policy, particularly in the context of post-pandemic economic recovery and inflation management.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. The video script discusses the Federal Reserve's efforts to bring down inflation, which had run well above the 2% target, and the current progress toward achieving a sustainable path back to this objective.

💡Labor Market

The labor market encompasses the economic activity related to employment, including the demand for labor, the supply of labor, and the determination of wages. The script describes the labor market's transition from being overheated to cooling considerably, with unemployment rates rising and the supply of workers increasing.

💡Supply Constraints

Supply constraints refer to limitations that prevent the production of goods and services from meeting demand. The video mentions that supply constraints have normalized after the pandemic, contributing to the decline in inflation and the improvement in economic conditions.

💡Disinflationary Episodes

Disinflationary episodes are periods in which the rate of inflation slows down or decreases. The script refers to the Federal Reserve's aim to avoid the sharp increases in unemployment that characterized earlier disinflationary episodes, highlighting the challenge of managing inflation while maintaining a strong labor market.

💡Pandemic Economic Distortions

Pandemic economic distortions describe the unusual economic conditions and disruptions caused by the COVID-19 pandemic, such as changes in consumer behavior, labor force participation, and supply chain disruptions. The script discusses how these distortions have faded and their impact on the economy and inflation.

💡FOMC (Federal Open Market Committee)

The FOMC is the branch of the Federal Reserve responsible for making key decisions about interest rates and the direction of monetary policy. The script mentions the FOMC's focus on bringing down inflation and the measures it has taken to adjust policy in response to economic data.

💡Transitory Inflation

Transitory inflation is a short-term increase in prices that is expected to be temporary and not indicative of long-term trends. The video script discusses the initial belief that the pandemic-related inflation spike was transitory and how this assessment evolved as inflation persisted.

💡Anchored Inflation Expectations

Anchored inflation expectations mean that households and businesses expect the rate of inflation to remain stable over time. The script emphasizes the importance of maintaining well-anchored inflation expectations to facilitate a return to the target inflation rate without causing economic slack.

💡Economic Slack

Economic slack refers to the amount by which the actual output of an economy falls short of its potential output. The video discusses the concern that disinflation might require economic slack, particularly in the labor market, but notes the unusual situation of disinflation occurring with low unemployment.

💡Policy Rate

The policy rate is the interest rate set by a country's central bank, which influences other interest rates in the economy. The script details the Federal Reserve's adjustments to the policy rate in response to inflationary pressures and the current stance of maintaining a restrictive level.

Highlights

Federal Reserve Chair J Pal delivers opening remarks at the Jackson Hole economic symposium, discussing the current economic situation and the path ahead for monetary policy.

Inflation has declined significantly since the peak of the pandemic, with the worst economic distortions fading and the labor market no longer overheated.

The Federal Reserve's objective has been to restore price stability while maintaining a strong labor market, avoiding sharp increases in unemployment seen in earlier disinflationary episodes.

Progress has been made towards the goal of 2% inflation, with prices rising 2.5% over the past 12 months, after a pause earlier this year.

The labor market has cooled from its previously overheated state, with the unemployment rate rising to 4.3%, still low by historical standards.

Job gains have slowed, job vacancies have fallen, and wage gains have moderated, indicating less tight labor market conditions compared to pre-pandemic times.

The Federal Reserve is attentive to risks on both sides of its dual mandate of maximum employment and stable prices, adjusting policy as needed.

Policy adjustments will depend on incoming data, the evolving outlook, and the balance of risks, with the direction of travel towards rate cuts now clear.

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

Inflation rose to levels not seen in a generation due to pandemic-related factors and supply chain disruptions, but has since fallen significantly with unemployment remaining low.

The pandemic led to shutdowns, uncertainty, and severe downside risks, with governments and central banks responding with extraordinary measures.

The initial burst of inflation in 2021 was concentrated in goods with short supply, such as motor vehicles, and was expected to be transitory.

The Federal Reserve's restrictive monetary policy helped restore balance between aggregate supply and demand, easing inflationary pressures while keeping inflation expectations anchored.

Inflation expectations have remained well anchored, facilitating the decline in inflation without the need for economic slack.

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

The Federal Reserve will review its principles and make appropriate adjustments through a thorough public review every five years, beginning later this year.

The pandemic economy has been unlike any other, with much to be learned from this extraordinary period, and the limits of knowledge demand humility and a questioning spirit.

Transcripts

all right um good morning um thank you

and um welcome to the first day of

sessions for the Federal Reserve Bank of

Kansas City Jackson Hall economic

Symposium my name is um Karen Dinan and

I'm going to be your moderator for

today's sessions um as as you heard last

night from Jeff the topic for the

Symposium uh is reassessing the

effectiveness and transmission of

monetary policy so uh it's a super

important topic particularly right now

and um we've got some great paper lined

up for this morning we've got two papers

and we also have a panel lined up for

that um but before we get to any of that

I am um delighted to say that we have

Federal Reserve chair uh J pal here to

deliver um opening remarks so um with

that let me welcome uh J pal to the

[Applause]

podium thank you Karen and thanks to our

host from the Kansas City fed it's it's

great to be back here

today uh 4 and a half years after Co

19's 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 than 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

characterized 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 economics 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 near-term

outlook for

policy for much of the past three years

inflation ran well above our 2% goal and

labor market conditions were extremely

tight the fomc's primary focus has been

on bringing down infl 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 our 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 the years just

prior to the pandemic we saw the

significant benefits to society that can

come from a long period of strong labor

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 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 6 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 slow down from

the previously frantic pace of

hiring even so the cooling in labor

market conditions is

unmistakable job gains remain solid but

have slowed this year job vacancies have

fallen and 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 labor market

conditions overall the continue the

economy continues to grow at a solid

Pace but the inflation and labor market

data show an evolving situation the

upside side 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 labor

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 G ederson's work

which we'll shortly discuss uh 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 is 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 car's 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 you 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 concern concerns over

Co 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 wre havoc on

Supply conditions 8 million people left

the workforce at its onset and the size

of the 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 in

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 and 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 for former

Shipmates out there

today the comment 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 midyear 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

conditions began to tighten uh 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 Co

continued to disrupt production globally

in including through new and extended

lockdowns in

China High rates of inflation were a

global phenomenon reflecting common

experiences rapid increases in the

demand for goods strained Supply chains

tight labor markets and sharp hikes in

commodity

prices the global nature of inflation

was unlike any period since the

1970s back then High inflation became

entrenched an outcome we were utterly

committed to

avoiding by mid 2022 the labor market

Market was extremely tight with

employment increasing by 6 A5 million

jobs from the middle of

2021 this increase in labor demand was

met in part by workers rejoining the

labor force as health concerns began to

fade but labor Supply remained

constrained and in the summer of 2022

labor 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 signaling a

severe labor 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 argued 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 and 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 4 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 their 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 it 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 labor 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 expect expectations since the

2000s had not been tested by a

persistent burst of high

inflation it was far from assur that the

inflation anchor would hold concerns

over de anchoring contributed to the

view that disinflation would require

slack in the economy and specifically in

the labor market an important takeaway

from recent experience is that anchored

inflation expectations reinforced by

vigorous Central Bank actions can

facilitate this inflation 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

labor 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

[Applause]