For release on delivery
10:00 a.m. EDT (8:00 a.m. MDT)
August 23, 2024
Review and Outlook
Remarks by
Jerome H. Powell
Chair
Board of Governors of the Federal Reserve System
at
"Reassessing the Effectiveness and Transmission of Monetary Policy,"
an economic symposium sponsored by the Federal Reserve Bank of Kansas City
Jackson Hole, Wyoming
August 23, 2024
Four and a half years after COVID-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 the 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 economic 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.
Near-Term Outlook for Policy
Let's begin with the current situation and the near-term outlook for policy.
For much of the past three years, inflation ran well above our 2 percent goal, and
labor market conditions were extremely tight. The Federal Open Market Committee's
(FOMC) primary focus has been on bringing down 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 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.1
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 percent over the past 12 months (figure 1).2 After a pause earlier this
year, progress toward our 2 percent objective has resumed. My confidence has grown
that inflation is on a sustainable path back to 2 percent.
Turning to employment, in 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.3
Today, the labor market has cooled considerably from its formerly overheated
state. The unemployment rate began to rise over a year ago and is now at 4.3 percent-
still low by historical standards, but almost a full percentage point above its level in early
2023 (figure 2). Most of that increase has come over the past six months. So far, rising
1
Shiller (1997) and Stantcheva (2024) study why people dislike inflation. Pfafjar and Winkler (2024)
study households' attitudes toward inflation and unemployment. Binetti, Nuzzi, and Stantcheva (2024)
investigate households' attitudes toward, and understanding of, inflation. Kaplan and Schulhofer-Wohl
(2017) and Jaravel (2021) document heterogeneity in the inflation rate experienced by households across
the income distribution.
2
The data for the personal consumption expenditures (PCE) price index is available for June 2024. Over
the 12 months to June 2024, the PCE price index increased 2.5 percent. Data for the consumer price index
and producer price index are available through July 2024 and can be used to estimate the level of the PCE
price index through July. While such an estimate is subject to uncertainty, it suggests that inflation
remained near 2.5 percent through July.
3
Research documenting such benefits include Aaronson and others (2019), who discuss the experience in
the 2010s and review related historical evidence.
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 slowdown 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.4 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 2019. Nominal wage gains have moderated. All told,
labor market conditions are now less tight than just before the pandemic in 2019-a year
when inflation ran below 2 percent. 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 economy continues to grow at a solid pace. But the inflation and
labor market data show an evolving situation. The upside 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 percent 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.
The Rise and Fall of Inflation
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 is a growing body of
research on these questions, and this is a good time for this discussion.5 It is, of course,
too soon to make definitive assessments. This period will be analyzed and debated long
after we are gone.
The arrival of the COVID-19 pandemic led quickly to shutdowns in economies
around the world. It was 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 U.S. Congress unanimously passed
the CARES 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 the economy began to
grow again. 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. The ongoing pandemic
shaped the pattern of the recovery. Lingering concerns over COVID 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 wreaked havoc on supply conditions. Eight million people left
the workforce at its onset, and the size of 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 (figure 3).6 Supply chains were snarled by a combination of lost workers,
disrupted international trade linkages, and tectonic shifts in the composition and level of
demand (figure 4). Clearly, this was nothing like the slow recovery after the Global
Financial Crisis.
Enter 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 in 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.7
The good ship Transitory was a crowded one, with most mainstream analysts and
advanced-economy central bankers on board.8 The common 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 to September 2021, although
progress came slower than expected (figure 5). The case began to weaken around
midyear, as was reflected in our communications. Beginning in October, the data turned
hard against the transitory hypothesis.9 Inflation rose and broadened out from goods into
7
For example, former Chair Ben Bernanke and Olivier Blanchard summarize the standard approach in their
work on inflation the following way: "Standard central banking doctrine holds that, so long as inflation
expectations are reasonably well anchored, there is a case for 'looking through' temporary supply shocks
rather than responding to the short-run increase in inflation" (Blanchard and Bernanke, 2024, p. 2). Clarida
(forthcoming) notes how central banks around the world faced a sharp rise in the relative price of goods
and chose, at least initially, to accommodate the price pressures with an expected transitory increase in
inflation.
8
In the September 2021 Summary of Economic Projections (SEP), the median projection for headline
inflation in 2022 was 2.2 percent. In the August 2021 Survey of Professional Forecasters (the closest
survey to the September SEP), the median projection for headline inflation in 2022 was also 2.2 percent.
Projections from the Blue Chip survey were similar around this time.
9
Beginning with the data for October, readings for monthly core PCE jumped to 0.4 percent or higher and
inflationary pressures broadened out across goods and services categories. And monthly job gains, already
strong, were consistently revised higher over the second half of 2021. Measures of wage inflation also
accelerated.
services. It became clear that the high inflation was not transitory, and that it would
require a strong policy response if inflation expectations were to remain well anchored.
We recognized that and pivoted beginning in November. Financial conditions began to
tighten. After phasing out our asset purchases, we lifted off in March 2022.
By early 2022, headline inflation exceeded 6 percent, with core inflation above
5 percent. 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
rotation in demand from goods to services were taking much longer than expected, in part
due to further COVID waves in the U.S.10 And COVID continued to disrupt production
globally, including through new and extended lockdowns in China.11
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.12 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 was extremely tight, with employment increasing
by over 61⁄2 million 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 (figure 6).13 Inflation peaked at 7.1 percent 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.14 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. We have
held our policy rate at its current restrictive level since July 2023 (figure 7).
The summer of 2022 proved to be the peak of inflation. The 4-1/2 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.
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 models said, but
the stability of longer-run inflation expectations since the 2000s had not been tested by a
persistent burst of high inflation. It was far from assured 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 disinflation 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.15 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 percent 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 percent inflation over time. That confidence has been built over decades
and reinforced by our actions.
That is my assessment of events. Your mileage may vary.
Conclusion
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.
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