Fed Chair Powell- "The time has come for policy to adjust"
In his speech at the Jackson Hole symposium, Federal Reserve Chair Jerome Powell highlighted the evolving economic landscape as the U.S. recovers from the disruptions caused by the COVID-19 pandemic. Powell noted that the worst of the pandemic-related economic distortions, such as supply constraints and an overheated labor market, are fading. Inflation has declined significantly, and labor market conditions have moderated from their previously overheated state. However, Powell emphasized that the journey towards fully restoring price stability is not yet complete.
A key takeaway from Powell’s remarks was his assertion that “the time has come for policy to adjust.” While he did not explicitly state that the adjustment would occur at the next Federal Open Market Committee (FOMC) meeting, Powell indicated that the direction of monetary policy is clear, with future rate cuts dependent on incoming economic data and the balance of risks between inflation and employment. This cautious approach reflects the Fed’s commitment to ensuring that inflation returns to its 2% target while supporting a strong labor market.
It will be interesting to see if the markets sell off in disappointment that the Fed is not stating that the Fed will cut rates in September. This means participants will pay close attnetion to key upcoming economic data points including the PCE Data (8/30), Jobs data (9/6), and CPI (9/11).
Powell provided a detailed overview of the current economic situation, noting that inflation is now much closer to the Fed’s 2% objective, with prices having risen 2.5% over the past 12 months. He expressed growing confidence that inflation is on a sustainable path back to target levels. On the labor market front, Powell acknowledged that conditions have cooled, with the unemployment rate rising to 4.3%, up from early 2023 levels, but still low by historical standards. He highlighted that the increase in unemployment has largely been due to an increase in the supply of workers rather than elevated layoffs.
Powell’s speech also touched on the Fed’s efforts to maintain a balance between its dual mandates of price stability and full employment. He emphasized that while the risks to inflation have diminished, the downside risks to employment have increased. As such, the Fed remains attentive to these risks and is prepared to adjust its policy stance accordingly. Powell reiterated that the current level of the policy rate provides ample room to respond to any emerging economic risks, including further weakening in labor market conditions.
Looking back at the inflationary surge that began in 2021, Powell explained that the initial burst of inflation was driven by a combination of pandemic-related supply constraints and strong consumer demand. While the Fed initially viewed this inflation as transitory, it became clear by late 2021 that a more robust policy response was needed to anchor inflation expectations and bring inflation down. Powell credited the Fed’s restrictive monetary policy, along with the unwinding of pandemic-related distortions, for the subsequent decline in inflation.
Importantly, Powell underscored the role of anchored inflation expectations in achieving disinflation without causing significant economic slack. He noted that the stability of these expectations was crucial in facilitating the decline in inflation while preserving labor market strength. Powell’s remarks suggest that the Fed’s actions have been successful in navigating this delicate balance, although he acknowledged that the pandemic economy has been unlike any other, and much remains to be learned.
In conclusion, Powell emphasized the need for humility and a willingness to learn from the extraordinary economic period brought on by the pandemic. He indicated that the Fed’s ongoing review of its monetary policy framework would incorporate lessons from the past while being open to new ideas. As the Fed continues to adjust its policies in response to evolving economic conditions, Powell’s speech made it clear that the central bank remains committed to its dual mandate and is prepared to take the necessary steps to achieve its goals.