Jackson Hole Symposium Federal Reserve Chair Jerome Powell’s remarks
Summary
TLDRThe 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
📈 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.
📉 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.
🌐 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.
🔗 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.
Mindmap
Keywords
💡Monetary Policy
💡Inflation
💡Labor Market
💡Supply Constraints
💡Disinflationary Episodes
💡Pandemic Economic Distortions
💡FOMC (Federal Open Market Committee)
💡Transitory Inflation
💡Anchored Inflation Expectations
💡Economic Slack
💡Policy Rate
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]
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