The Fed Chairman released the strongest message on rate cuts: Now is the time to adjust policy (with full text of speech)
2024-08-25
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The September interest rate meeting is not far away, and Federal Reserve Chairman Powell has released the strongest signal of a rate cut so far.
"Now is the time to adjust policy." On August 23rd local time, Powell delivered a speech at the Jackson Hole Global Central Bank Annual Meeting and admitted that inflation is now close to the 2% target set by the Federal Reserve, and the labor market has cooled down from its previous overheated state.
Since July 2023, the Fed has maintained its policy rate at a high level of 5.25%-5.5% after an almost unprecedented round of aggressive rate hikes. The market expects that the Fed will start cutting interest rates at its September meeting.
The title of Powell's speech is "Reassessing the Effectiveness and Transmission of Monetary Policy."
Powell said the Fed will do everything it can to support a strong labor market while making further progress on price stability. He believes that the current level of the policy rate gives the Fed enough room to respond to any risks it may face, including further unwelcome labor market weakness.
Powell stressed that easing supply and demand and maintaining stable inflation expectations are the key to the Fed's efforts to control inflation while maintaining a low unemployment rate. He said that efforts to ease aggregate demand and anchor expectations have jointly pushed inflation toward the 2% target.
"I am increasingly confident that inflation will return to 2 percent," Powell said in his speech.
Powell's speech was welcomed by the market. As of the close of August 23, the Nasdaq index rose 1.47%, the Dow Jones Industrial Average rose 1.14%, and the S&P 500 rose 1.15%. The US dollar index fell 0.82%.
The Jackson Hole Annual Meeting is held in Jackson Hole, Wyoming, the United States, in August every year and lasts for three days each time. Since the global financial crisis from 2007 to 2009, the market has paid special attention to the monetary policy trends that the annual meeting may imply.
The following is the full text of the speech (Some content has been deleted）：
Four and a half years after the COVID-19 outbreak, the most severe economic distortions related to the pandemic are receding, inflation has fallen significantly, and labor markets are no longer overheated. Conditions are now less tight than they were prevalent before the pandemic, and supply constraints have normalized. The balance of risks to our two mandates has also changed. Our goal has long been to restore price stability while maintaining a strong labor market and avoiding the sharp rise in unemployment that occurred during previous periods of disinflation, when inflation expectations were not well anchored. While the task is not yet complete, we have made great progress toward that goal.
Today, I will first talk about the current economic situation and the future direction of monetary policy, and then turn to a discussion of post-pandemic economic events, exploring why inflation has risen to levels not seen in a generation and why inflation has fallen so much while unemployment has remained low.
Recent Policy Outlook
We begin with the current situation and the near-term policy outlook.
For much of the past three years, inflation has been well above our 2 percent objective, and labor market conditions have been extremely tight. The primary objective of the Federal Open Market Committee (FOMC) has always been to reduce inflation, and to do so modestly. Most Americans alive today have never felt the pain of sustained periods of high inflation. Inflation has caused significant hardship, particularly for those who can least afford higher costs for necessities such as food, housing, and transportation. The stress and sense of unfairness that high inflation has caused persists to this day.
Implementing a restrictive monetary policy will help promote the balance between total supply and total demand, ease inflationary pressure and ensure inflation expectations.Inflation is now well within our target, prices have risen 2.5% over the past 12 months. After a pause earlier in the year, we are back on track towards our 2% target.I am increasingly confident that inflation will return to 2%。
Regarding employment, in the years before the COVID-19 pandemic, we saw the enormous benefits of a long-term strong labor market: low unemployment, high participation rates, historically low racial employment gaps, and healthy real wage growth increasingly concentrated among lower-income groups, all with low and stable inflation.
Today, the labor market has cooled significantly from its previous overheated state.The unemployment rate began to rise more than a year ago, and at 4.3%, it is still low by historical standards but almost a full percentage point above its level at the beginning of 2023. Most of this increase has occurred in the past six months. So far, the rising unemployment rate is not the result of large-scale layoffs, as was the case during the recession. Instead, the increase mainly reflects an increase in the labor supply and a slowdown in the previously frenetic pace of hiring. Even so, the cooling of labor market conditions is undeniable. Job growth has remained stable but has slowed this year. The number of job openings has declined, and the ratio to the unemployment rate has returned to its pre-pandemic range. Hiring and quit rates are now below the levels that prevailed in 2018 and 2019. Nominal wage growth has slowed. All in all, labor market conditions are less tight today than they were before the pandemic in 2019, when inflation was below 2%. In the short term, the labor market seems unlikely to be a source of rising inflationary pressures.We do not seek or welcome a further cooling of labor market conditions。
Overall, the economy continues to grow at a solid pace. But inflation and labor market data suggest a changing landscape. Risks to higher inflation have receded, and downside risks to employment have increased. As we emphasized in our last FOMC statement, we are mindful of risks on both sides of the dual mandate.
Now is the time to adjust policyThe direction of action 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 while making further progress on price stability.With appropriate easing of policy constraints, we have good reason to believe that the economy will return to 2 percent inflation while maintaining a strong labor market. Our current level of the policy rate gives us ample room to address any risks we may face, including the risk of further unwelcome labor market weakness.
Rising and falling inflation rates
Now, let's talk about why inflation is rising, and why it has fallen so much while unemployment has remained low. There is a growing body of research on these issues, and now is a good time to discuss them. Of course, it is too early to make a definitive assessment. This period will be analyzed and discussed long after we are gone.
The arrival of the coronavirus pandemic led to the rapid shutdown of economies around the world, a time of uncertainty and significant downside risk. As often happens in times of crisis, Americans adapted and innovated. The government responded with extraordinary force, particularly the unanimous passage of the CARES Act by Congress. At the Federal Reserve, we used our powers with unprecedented force to stabilize the financial system and help avoid a depression.
After a historically deep but brief recession, the economy began to grow again in mid-2020. As the risk of a deep, prolonged recession recedes, we face the risk of a repeat of the painful, slow recovery that followed the global financial crisis as the economy reopens.
Congress provided substantial additional fiscal support in late 2020 and early 2021. Spending recovered strongly in the first half of 2021, with the ongoing COVID-19 pandemic shaping the pattern of the recovery, as continued concerns about the pandemic weighed on spending on offline services. However, pent-up demand, stimulus policies, changes in work and leisure practices due to the pandemic, and additional savings resulting from limited spending on services all contributed to the historic surge in consumer spending on goods.
The pandemic has also wreaked havoc on supply conditions. Eight million people left the labor force at the start of the pandemic, and the size of the labor force at the start of 2021 was still four million smaller than its pre-pandemic level. The labor force will not return to its pre-pandemic trend until mid-2023. Supply chains have been disrupted by the loss of workers, disruptions to international trade links, and structural changes in the composition and level of demand. Clearly, this is a stark departure from the slow recovery that followed the global financial crisis.
Enter inflation. Inflation was below target in 2020, but in March and April 2021, it surged. The initial burst of inflation was concentrated rather than broad-based, with particularly large price increases in scarce goods such as automobiles. At the outset, my colleagues and I judged that these pandemic-related factors would not persist and that the sudden increase in inflation would therefore likely pass fairly quickly without the need for a monetary policy response—in short, that it would be temporary. Standard thinking has long been that it is appropriate for central banks to ignore temporary spikes in inflation as long as inflation expectations remain well-preserved.
The Ephemeral was a crowded ship, with most mainstream analysts and central bankers from advanced economies on board. The general expectation was that supply conditions would improve fairly quickly and demand would recover quickly, shifting back from goods to services, reducing inflation.
For a while, the data and the transitory assumptions were consistent. Monthly data on core inflation declined each month from April to September 2021, albeit at a slower pace than expected. Things started to weaken around mid-year, which was reflected in our communications. Starting in October, the data became sharply inconsistent with the transitory assumptions, with inflation rising and spreading from goods to services. It became clear that high inflation was not transitory and that a strong policy response was needed if inflation expectations were to remain anchored. We recognized this and began to pivot in November. Financial conditions began to tighten, and we took off in March 2023 after phasing out asset purchases.
In early 2022, headline inflation exceeded 6% and core inflation exceeded 5%, and new supply shocks emerged. The war between Russia and Ukraine led to a sharp rise in energy and commodity prices, and the improvement in supply conditions and the cycle of demand from goods to services took much longer than expected, partly due to the further intensification of the COVID-19 pandemic in the United States. The COVID-19 pandemic continues to disrupt global production.
High inflation is a global phenomenon that reflects common experiences: a rapid increase in demand for goods, tight supply chains, tight labor markets, and large increases in commodity prices. The global nature of inflation is unlike any period of inflation since 1970. Back then, high inflation was already entrenched, an outcome we were desperate to avoid.
In mid-2022, the labor market is extremely tight, with more than 6.5 million more people employed than in mid-2021. The increase in labor demand is met, in part, as health concerns begin to subside and workers rejoin the labor force. However, labor supply remains constrained, and in the summer of 2022, the labor force participation rate was well below pre-pandemic levels. From March 2022 to the end of the year, the number of open jobs was almost twice the number of unemployed people, indicating a severe labor shortage. Inflation peaks at 7.1% in June 2022.
Two years ago, from this podium, I discussed the possibility that addressing inflation might bring some pain, in the form of higher unemployment and slower growth. Some argued that successfully fighting inflation would come at the cost of a recession and prolonged periods of high unemployment. I expressed our unconditional commitment to restore full price stability and to persist until that work was done.
The FOMC did not retreat from its responsibilities, and our actions powerfully 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 have maintained our policy rate at its current restrictive level since July 2023.
It turns out that peak inflation occurred in the summer of 2022. Against a backdrop of low unemployment, inflation is 4.5 percentage points lower than its peak two years earlier, a welcome and historically unusual outcome.
How did inflation fall without unemployment rising significantly above its estimated natural rate?
Pandemic-related supply and demand distortions, as well as severe shocks to energy and commodity markets, were important drivers of high inflation, and the reversal of these dynamics was key to the decline in inflation. It took much longer than expected for these factors to ease, but ultimately they played an important role in the subsequent disinflation. Our restrictive monetary policy contributed to the moderation in aggregate demand, which, together with improvements in aggregate supply, sustained healthy growth in the economy while reducing inflationary pressures. As labor demand slowed, the historically high job vacancies relative to the unemployment rate have normalized, largely due to a decline in the job vacancies rate and the absence of large, disruptive layoffs, which has made the labor market less of a source of inflationary pressure.
Let’s turn to the critical importance of inflation expectations. Standard economic models have long reflected the view that, as long as inflation expectations are anchored to the target, inflation will return to its target without requiring economic slack when product and labor markets are balanced. That’s what the models say, but the effectiveness of the “inflation anchor” is far from proven, as persistently high inflation has occurred despite stable long-term inflation expectations since the 2000s. Concerns about de-anchoring have fostered an alternative view that disinflation will require slack in the economy, especially in the labor market. An important conclusion from recent experience is that anchored inflation expectations, combined with forceful central bank action, can promote disinflation without requiring slack.
This narrative attributes much of the rise in inflation to the conflict between overheated and temporarily distorted demand and constrained supply. Although researchers vary in their methods and, to some extent, their conclusions, a consensus seems to be emerging that attributes the rise in inflation to this conflict. In sum, our efforts to moderate aggregate demand as we recover from the distortions of the pandemic, combined with our efforts to anchor expectations, are pushing inflation toward our 2 percent objective, which is increasingly likely to be achieved.
"We can keep inflation in check while maintaining a strong labor market only if inflation expectations are anchored, reflecting the public's confidence that the Bank will return inflation to 2 percent over time. That confidence has been built over decades, and our actions have strengthened it."
This is my assessment of the situation, your views may differ.
in conclusion
Finally, let me emphasize that the pandemic economy has proven unlike any other, and there is still much to learn from this extraordinary period. Our statement on longer-run goals and monetary policy strategy emphasizes our commitment to reviewing our principles through a public review every five years and making appropriate adjustments. When we begin that process later this year, we will be open to criticism and new ideas while preserving the strength of our framework. The limits of our knowledge, as have been so evident during the pandemic, require us to remain humble and skeptical, focusing on learning from the past and applying them flexibly to meet the challenges of today.
The Paper reporter Lin Qianbing
(This article is from The Paper. For more original information, please download the "The Paper" APP)
