Full text of Jerome Powell's Jackson Hole speech: Time for policy adjustments

On August 23, Federal Reserve Chairman Powell delivered a speech on the outlook for the U.S. economy at Jackson Hole. He stated that the time for policy adjustments has come, the direction of the policy is clear, and the timing and pace of rate cuts will depend on data, outlook, and the balance of risks.

Below is the full text of Powell's speech:

Four and a half years after the arrival of the pandemic, the most severe economic distortions related to the pandemic are fading. Inflation has significantly decreased. The labor market is no longer overheated, and the current situation is looser than before the pandemic. Supply constraints have normalized. The balance of risks for our two tasks has changed. Our goal is to restore price stability while maintaining a strong labor market, avoiding a sharp rise in the unemployment rate, which is a characteristic of deflationary periods with unstable early inflation expectations. We have made significant progress in achieving this outcome. While the task is not yet complete, we have made significant progress towards this goal.

Today, I will first discuss the current economic situation and the future direction of monetary policy. Then, I will discuss economic events since the outbreak of the pandemic, exploring why inflation has risen to levels unseen in a generation and why inflation has fallen so much while the unemployment rate remains low.

Recent Policy Outlook

Let's start with the current situation and the near-term policy outlook.

For most of the past three years, inflation has been well above our 2% target, and the labor market conditions have been extremely tight. The Federal Open Market Committee (FOMC) has rightly focused on reducing inflation. Prior to this event, most Americans have not experienced the pain of sustained high inflation. Inflation has brought significant difficulties, especially for those who are least able to afford the higher costs of necessities such as food, housing, and transportation. The pressures and sense of unfairness caused by high inflation still linger.

Tight monetary policy helps restore the balance between total supply and total demand, alleviate inflation pressures, and stabilize inflation expectations. Inflation is now closer to our target, with prices rising 2.5% over the past 12 months. After a temporary decline earlier this year, we have continued to progress towards our 2% inflation target. My confidence in sustainable return to 2% inflation has strengthened.

In terms of employment, in the years before the pandemic, we saw the enormous benefits that long-term strong labor market conditions can bring to society: low unemployment rates, high participation rates, historically low racial employment gaps, and low inflation stability, with healthy real wage growth increasingly concentrated among low-income groups.

Today, the labor market has cooled significantly from its previous overheated state. The unemployment rate started rising over a year ago and is currently at 4.3%—still relatively low by historical standards, but a full percentage point higher than early 2023. Most of the increase in the unemployment rate has occurred in the past six months. So far, the rise in the unemployment rate is not the result of increased layoffs during an economic downturn. Instead, the rise in the unemployment rate mainly reflects a significant increase in labor supply and a slowdown in the previously frantic pace of hiring. Nevertheless, the cooling of the labor market conditions is evident Employment growth remains strong but has slowed this year. Job vacancies have decreased, and the ratio of job vacancies to unemployed persons has returned to pre-pandemic levels. Current employment rates and quit rates are lower than in 2018 and 2019. Nominal wage growth has decelerated. Overall, the current labor market conditions are somewhat relieved compared to before the outbreak in 2019, when inflation was below 2%. The labor market does not seem likely to quickly become a source of rising inflationary pressures. We are not seeking nor welcoming further cooling of labor market conditions.

Overall, the economy continues to grow steadily. However, inflation and labor market data indicate ongoing changes. The upward risks to inflation have diminished. The downward risks to employment have increased. As emphasized in our previous Federal Open Market Committee statement, we are attentive to the risks faced by both sides of the dual mandate.

It is time for policy adjustments. The direction forward is clear, and the timing and pace of rate cuts will depend on the latest data, evolving outlook, and risk balance.

As we make further progress on price stability, we will make every effort to support a robust labor market. With appropriate relaxation of policy constraints, we have good reason to believe the economy will return to 2% inflation while maintaining a strong labor market. The current policy interest rate level provides us with sufficient room to address any risks that may arise, including the risk of further weakening labor market conditions.

The Rise and Fall of Inflation

Now let's explore why inflation is rising and why it has sharply declined despite a low unemployment rate. There is increasing research on these issues, and now is a good time for discussion. Of course, it is still too early to make definitive assessments. This period will be analyzed and debated for a long time after we are gone.

The arrival of the pandemic swiftly brought economies around the world to a standstill. It was a period of immense uncertainty and severe downside risks. As often happens during crises, Americans adapted and innovated. Governments worldwide made extraordinary responses, especially the unanimous passage of the CARES Act by the U.S. Congress. At the Fed, we used our authorities to stabilize the financial system to an unprecedented extent and help prevent an economic depression.

After experiencing a historically deep but brief recession, the economy began to grow again in mid-2020. With the risks of a severe, prolonged recession receding and the economy reopening, we face the risk of a painful, slow recovery reminiscent of the global financial crisis.

Congress provided significant additional fiscal support at the end of 2020 and early 2021. Spending surged in the first half of 2021. The ongoing pandemic shaped the pattern of recovery. Concerns about the new coronavirus persisted, affecting in-person service spending. However, pent-up demand, stimulative policies, changes in work and leisure patterns, and additional savings from constrained service spending led to a historic surge in goods consumption The epidemic has also caused serious disruptions to the supply situation. At the beginning of the epidemic, 8 million people left the labor market, and at the beginning of 2021, the labor force was still 4 million lower than before the epidemic. It will not be until mid-2023 that the labor force will recover to pre-epidemic levels. Worker attrition, interrupted international trade links, and structural changes in demand composition and levels have led to chaos in the supply chain. Clearly, this is completely different from the slow recovery after the global financial crisis.

Inflation follows. After being below target levels in 2020, inflation soared in March and April 2021. The initial inflation surge was concentrated rather than widespread, with prices of goods in short supply such as cars rising sharply. My colleagues and I initially judged that these epidemic-related factors would not persist, so the sudden rise in inflation is likely to pass quickly without the need for monetary policy response - in short, the rise in inflation may be temporary and does not require monetary policy measures. The conventional thinking has always been that as long as inflation expectations remain well anchored, central banks can appropriately respond to temporary increases in inflation.

"The transience of inflation" is a crowded ship filled with most mainstream analysts and central bank governors of developed economies. At that time, it was widely expected that supply conditions would improve rapidly, demand would recover quickly, and demand would shift from goods to services, thereby reducing inflation.

For a while, the data did show that the inflation was temporary. From April to September 2021, core inflation month-on-month data declined each month, albeit slower than expected. As reflected in our communications, the downward trend began to weaken around the middle of the year. Starting from October, the data strongly contradicted the assumption of transience. Inflation rose and expanded from goods to services. It is clear that high inflation is not temporary, and strong policy responses are needed to maintain stable inflation expectations. We recognized this and began adjusting from November. Financial conditions began to tighten, and after gradually halting asset purchases, we began raising interest rates in March 2022.

By early 2022, overall inflation exceeded 6%, with core inflation exceeding 5%. New supply shocks emerged. The Russia-Ukraine conflict led to sharp increases in energy and commodity prices. The improvement in supply conditions and the time it took for demand to shift from goods to services were much longer than expected, partly due to the further spread of the COVID-19 pandemic in the United States. The new coronavirus pandemic continues to disrupt global production.

High inflation is a global phenomenon, reflecting common experiences: rapid growth in commodity demand, tight supply chains, labor market tightness, and sharp increases in commodity prices. The global nature of inflation is different from any period since the 1970s. At that time, high inflation became entrenched - a result we are determined to avoid.

By mid-2022, the labor market is extremely tight, with employment increasing by 6.5 million compared to mid-2021. The continuously increasing labor demand is to some extent being met by workers returning to the job market after the epidemic dissipates. However, labor supply remains constrained, and in the summer of 2022, the labor force participation rate is still far below pre-pandemic levels From March 2022 to the end of the year, the number of job vacancies is nearly twice that of unemployed people, indicating a severe labor shortage. In June 2022, inflation peaked at 7.1%.

Two years ago, I discussed on this platform the possibility that addressing inflation issues could lead to rising unemployment and slowing growth. Some believed that controlling inflation would require economic recession and prolonged high unemployment rates. I stated at that time, the Federal Reserve is unconditionally committed to fully restoring price stability and will persist until the job is done.

The Federal Open Market Committee has decisively fulfilled our responsibilities, and our actions strongly demonstrate our commitment to restoring price stability. We raised the policy rate by 425 basis points in 2022 and another 100 basis points in 2023. Since July 2023, we have maintained the policy rate at its current restrained level.

The summer of 2022 proved to be the peak of inflation. Inflation has decreased by 4.5 percentage points from its peak two years ago, occurring against a backdrop of low unemployment rates - a popular and historically unusual outcome.

How did inflation decline without a sharp increase in unemployment rates exceeding their natural level?

Distortions in supply and demand related to the epidemic, as well as severe impacts on the energy and commodities markets, were important drivers of high inflation, and the reversal of these factors was a key part of the decline in inflation. The unwinding of these factors took longer than expected but ultimately played a crucial role in the subsequent decline in inflation. Our restrictive monetary policy helped control total demand while improving total supply, easing inflationary pressures and allowing the economy to continue to grow healthily. As labor demand also slowed down, vacancies remained historically high relative to the unemployment rate, and the labor market normalized mainly through a decrease in vacant positions, without large-scale, disruptive layoffs, thereby preventing the labor market from becoming a source of inflationary pressure.

There is a crucial statement about inflation expectations. The standard economic model has long reflected the view that as long as inflation expectations are anchored to our target, inflation will return to the target when product and labor markets reach equilibrium, without the need for economic weakness. The model says so, but the stability of long-term inflation expectations has not been tested by prolonged outbreaks of high inflation since the 2000s. Whether the inflation "anchor" will persist remains far from certain. Concerns about de-anchoring lead people to believe that a slowdown in the economy, especially the labor market, is needed for inflation to fall. An important lesson from recent experiences is that firmly anchored inflation expectations, combined with strong central bank action, can facilitate a decline in inflation without the need for a slowdown.

This view largely attributes the rise in inflation to the unusual conflict between overheated and temporarily distorted demand and limited supply. While researchers have different approaches and conclusions to some extent, there seems to be a consensus forming, and I believe this consensus will attribute much of the rise in inflation to these collisions. In conclusion, **with the recovery from epidemic distortions, our efforts to control total demand, and the combined effect of anchoring inflation expectations, inflation is on a sustainable path to achieving our 2% target **

Only when anchored inflation expectations are possible to achieve a decline in inflation while maintaining a strong labor market. This reflects the public's confidence in the central bank bringing about around 2% inflation over time. This confidence has been built over decades and strengthened through our actions.

This is my assessment of the situation. Your views may differ.

Conclusion

Finally, I want to emphasize that the fact proves that the economy during the COVID-19 pandemic is different from other economic periods, and there is still much to learn from this extraordinary period. Our statements on long-term goals and monetary policy strategy emphasize our commitment to evaluating our principles through a thorough public review every five years and making appropriate adjustments. As we begin this process later this year, we will welcome criticism and new ideas while retaining the strengths of our framework. The limitations of our knowledge - so evident during the pandemic - indicate the need for humility and a spirit of questioning, focusing on learning from the past and applying it flexibly to our current challenges