For release on delivery
12.30 PM EDT
March 21, 2022
Restoring Price Stability
Remarks by
Jerome H. Powell
Chair Pro Tempore
Board of Governors of the Federal Reserve System
at
"Policy Options for Sustainable and Inclusive Growth"
38th Annual Economic Policy Conference
National Association for Business Economics
Washington, D.C.
March 21, 2022
Thank you for the opportunity to speak with you today.
Let me first pause to recognize the millions who are suffering the tragic
consequences of Russia's invasion of Ukraine.
At the Federal Reserve, our monetary policy is guided by the dual mandate to
promote maximum employment and stable prices. From that standpoint, the current
picture is plain to see: The labor market is very strong, and inflation is much too high.
My colleagues and I are acutely aware that high inflation imposes significant hardship,
especially on those least able to meet the higher costs of essentials like food, housing, and
transportation. There is an obvious need to move expeditiously to return the stance of
monetary policy to a more neutral level, and then to move to more restrictive levels if that
is what is required to restore price stability. We are committed to restoring price stability
while preserving a strong labor market.
At our meeting that concluded last week, we took several steps in pursuit of these
goals: We raised our policy interest rate for the first time since the start of the pandemic
and said that we anticipate that ongoing rate increases will be appropriate to reach our
objectives. We also said that we expect to begin reducing the size of our balance sheet at
a coming meeting. In my press conference, I noted that action could come as soon as our
next meeting in May, though that is not a decision that we have made. These actions,
along with the adjustments we have made since last fall, represent a substantial firming in
the stance of policy with the intention of restoring price stability. In my comments today,
I will first discuss the economic conditions that warrant these actions and then address the
path ahead for monetary policy.
The Labor Market Is Very Strong and Extremely Tight
To begin with employment, in the last few years of the historically long expansion
that ended with the arrival of the pandemic, we saw the remarkable benefits of an
extended period of strong labor market conditions. We seek to foster another long
expansion in order to realize those benefits again.
The labor market has substantial momentum. Employment growth powered
through the difficult Omicron wave, adding 1.75 million jobs over the past three months.
The unemployment rate has fallen to 3.8 percent, near historical lows, and has reached
this level much faster than anticipated by most forecasters (figure 1). While disparities in
employment remain, job growth has been widespread across racial, ethnic, and
demographic groups.
By many measures, the labor market is extremely tight, significantly tighter than
the very strong job market just before the pandemic. There are far more job openings
going unfilled today than before the pandemic, despite today's unemployment rate being
higher. Indeed, there are a record 1.7 posted job openings for each person who is looking
for work. Record numbers of people are quitting jobs each month, typically to take
another job with higher pay. And nominal wages are rising at the fastest pace in decades,
with the gains strongest for those at the lower end of the wage distribution and among
production and nonsupervisory workers (figure 2).
It is worth considering why the labor market is so tight, given that the
unemployment rate is actually higher than it was before the pandemic. One explanation
is that the natural rate of unemployment may be temporarily elevated, so wage pressure is
greater for any given level of unemployment. The sheer volume of hiring may have
taxed the capacity of the market to bring workers and jobs together. The Delta and
Omicron variants complicated hiring, and the strong financial position of households may
have allowed some to be more selective in their job search. Over time, we might expect
these factors to fade, reducing pressure in the job market.
A second source of labor market tightness is that the labor force participation rate
dropped sharply in the pandemic and has only partly recovered. As a result, the labor
force remains below its pre-pandemic trend (figure 3). Total demand for labor, measured
by total employment plus posted job openings, has substantially recovered and far
exceeds the size of the workforce.
About half of the shortfall in labor force participation is attributable to retirements
during the pandemic.1 History suggests that most of those retirees are unlikely to reenter
the workforce. But some nonparticipation is due to factors that may fade with time, such
as caregiving needs and fear of contracting COVID-19. With prime-aged participation
still well below its pre-pandemic level, there is room for further progress. A more
complete rebound is, however, likely to take some time. Increases in labor force
participation often substantially lag declines in unemployment.
Overall, the labor market is strong but showing a clear imbalance of supply and
demand. Our monetary policy tools cannot help with labor supply in the near term, but in
a long expansion, the factors holding back supply will likely ease. In the meantime, we
aim to use our tools to moderate demand growth, thereby facilitating continued,
sustainable increases in employment and wages.
The Inflation Outlook Has Deteriorated Significantly
Turning to price stability, the inflation outlook had deteriorated significantly this
year even before Russia's invasion of Ukraine.
The rise in inflation has been much greater and more persistent than forecasters
generally expected. For example, at the time of our June 2021 meeting, every Federal
Open Market Committee (FOMC) participant and all but one of 35 submissions in the
Survey of Professional Forecasters predicted that 2021 inflation would be below 4
percent. Inflation came in at 5.5 percent.2
For a time, moderate inflation forecasts looked plausible-the one-month
headline and core inflation rates declined steadily from April through September. But
inflation moved up sharply in the fall, and, just since our December meeting, the median
FOMC projection for year-end 2022 jumped from 2.6 percent to 4.3 percent.
Why have forecasts been so far off? In my view, an important part of the
explanation is that forecasters widely underestimated the severity and persistence of
supply-side frictions, which, when combined with strong demand, especially for durable
goods, produced surprisingly high inflation.
The pandemic and the associated shutdown and reopening of the economy caused
a serious upheaval in many parts of the economy, snarling supply chains, constraining
labor supply, and creating a major boom in demand for goods and a bust in services
demand. The combination of the surge in goods demand with supply chain bottlenecks
led to sharply rising goods prices (figure 4). The most notable example here is motor
vehicles. Prices soared across the vehicles sector as booming demand was met by a sharp
decline in global production during the summer of 2021, owing to shortages of computer
chips. Production remains below pre-pandemic levels, and an expected sharp decline in
prices has been repeatedly postponed.
Many forecasters, including FOMC participants, had been expecting inflation to
cool in the second half of last year, as the economy started going back to normal after
vaccines became widely available.3 Expectations were that the supply-side damage
would begin to heal. Schools would reopen-freeing parents to return to work-and
labor supply would begin bouncing back, kinks in supply chains would begin resolving,
and consumption would start rotating back to services, all of which could reduce price
pressures. While schools are open, none of the other expectations has been fully met.
Part of the reason may be that, contrary to expectations, COVID has not gone away with
the arrival of vaccines. In fact, we are now headed once again into more COVID-related
supply disruptions from China. It continues to seem likely that hoped-for supply-side
healing will come over time as the world ultimately settles into some new normal, but the
timing and scope of that relief are highly uncertain. In the meantime, as we set policy,
we will be looking to actual progress on these issues and not assuming significant near-
term supply-side relief.
The Policy Response
As the magnitude and persistence of the increase in inflation became increasingly
clear over the second half of last year, and as the job market recovery accelerated beyond
expectations, the FOMC pivoted to progressively less accommodative monetary policy.
In June, the median FOMC participant projected that the federal funds rate would remain
at its effective lower bound through the end of 2022, and as the news came in, the
projected policy paths shifted higher (figure 5). The median projection that accompanied
last week's 25 basis point rate increase shows the federal funds rate at 1.9 percent by the
end of this year and rising above its estimated longer-run normal value in 2023. The
latest FOMC statement also indicates that the Committee expects to begin reducing the
size of our balance sheet at a coming meeting. I believe that these policy actions and
those to come will help bring inflation down near 2 percent over the next 3 years.
As always, our policy projections are not a Committee decision or fixed plan.
Instead, they are a summary of what the FOMC participants see as the most likely case
going forward. The events of the past four weeks remind us that, in tumultuous times,
what seems like the most likely scenario may change quite quickly: Each Summary of
Economic Projections reflects a point in time and can become outdated quickly at times
like these, when events are developing rapidly.
Thus, my main message today is that, as the outlook evolves, we will adjust
policy as needed in order to ensure a return to price stability with a strong job market.
Let me now turn to three questions about the likely evolution of policy.
How will fallout from the invasion of Ukraine affect the economy and monetary
policy? Russia's invasion of Ukraine may have significant effects on the world economy
and the U.S. economy. The magnitude and persistence of these effects remain highly
uncertain and depend on events yet to come.
Russia is one of the world's largest producers of commodities, and Ukraine is a
key producer of several commodities as well, including wheat and neon, which is used in
the production of computer chips. There is no recent experience with significant market
disruption across such a broad range of commodities. In addition to the direct effects
from higher global oil and commodity prices, the invasion and related events are likely to
restrain economic activity abroad and further disrupt supply chains, which would create
spillovers to the U.S. economy.
We might look to the historical experience with oil price shocks in the 1970s-
not a happy story. Fortunately, the United States is now much better situated to weather
oil price shocks.4 We are now the world's largest producer of oil, and our economy is
significantly less oil intensive than in the 1970s. Today a rise in oil prices has mixed
effects on the economy, lowering real household incomes and thus demand, but raising
investment in drilling over time and benefiting oil-producing areas more generally. On
net, oil shocks tend to weigh on output in the U.S. economy, but by far less than in the
1970s.
Second, how likely is it that monetary policy can lower inflation without causing a
recession? Our goal is to restore price stability while fostering another long expansion
and sustaining a strong labor market. In the FOMC participant projections I just
described, the economy achieves a soft landing, with inflation coming down and
unemployment holding steady. Growth slows as the very fast growth from the early
stages of reopening fades, the effects of fiscal support wane, and monetary policy
accommodation is removed.
Some have argued that history stacks the odds against achieving a soft landing,
and point to the 1994 episode as the only successful soft landing in the postwar period. I
believe that the historical record provides some grounds for optimism: Soft, or at least
soft-ish, landings have been relatively common in U.S. monetary history.5 In three
episodes-in 1965, 1984, and 1994-the Fed raised the federal funds rate significantly in
response to perceived overheating without precipitating a recession (figure 6).6 In other
cases, recessions chronologically followed the conclusion of a tightening cycle, but the
recessions were not apparently due to excessive tightening of monetary policy. For
example, the tightening from 2015 to 2019 was followed by the pandemic-induced
recession.7
I hasten to add that no one expects that bringing about a soft landing will be
straightforward in the current context-very little is straightforward in the current
context. And monetary policy is often said to be a blunt instrument, not capable of
surgical precision. My colleagues and I will do our very best to succeed in this
challenging task. It is worth noting that today the economy is very strong and is well
positioned to handle tighter monetary policy.
5
See Alan Blinder (2022), "Landings Hard and Soft: The Fed, 1965-2020," slides from a presentation
delivered at Markus' Academy, Bendheim Center for Finance, Princeton University, Princeton, N.J.,
February 11, https://bcf.princeton.edu/wp-content/uploads/2022/01/Combined-Slides.pdf.
6
I have identified these episodes by a single important year in the tightening cycle, but in each case, the
period of tightening spanned more than one year.
7
As I argued more fully in a previous speech, while the postwar recessions up through 1981 were arguably
the result of stop-and-go policy, none of the recessions since then fit that mold so clearly; see Jerome H.
Powell (2018), "Monetary Policy in a Changing Economy," speech delivered at "Changing Market
Structure and Implications for Monetary Policy," a symposium sponsored by the Federal Reserve Bank of
Kansas City, held in Jackson Hole, Wyo., August 24,
https://www.federalreserve.gov/newsevents/speech/powell20180824a.htm.
Finally, what will it take to restore price stability? The ultimate responsibility for
price stability rests with the Federal Reserve. Price stability is essential if we are going to
have another sustained period of strong labor market conditions. I believe that the policy
approach that I have laid out is well suited to achieving this outcome. We will take the
necessary steps to ensure a return to price stability. In particular, if we conclude that it is
appropriate to move more aggressively by raising the federal funds rate by more than 25
basis points at a meeting or meetings, we will do so. And if we determine that we need to
tighten beyond common measures of neutral and into a more restrictive stance, we will
do that as well.
Our monetary policy framework, as embodied in our Statement on Longer-Run
Goals and Monetary Policy Strategy, emphasizes that having longer-term inflation
expectations anchored at our longer-run objective of 2 percent helps us achieve both our
dual-mandate objectives. While we cannot measure longer-term expectations directly,
we monitor a variety of survey- and market-based indicators. In the recent period, short-
term inflation expectations have, of course, risen with inflation, but longer-run
expectations remain well anchored in their historical ranges (figure 7).
The added near-term upward pressure from the invasion of Ukraine on inflation
from energy, food, and other commodities comes at a time of already too high inflation.
In normal times, when employment and inflation are close to our objectives, monetary
policy would look through a brief burst of inflation associated with commodity price
shocks. However, the risk is rising that an extended period of high inflation could push
longer-term expectations uncomfortably higher, which underscores the need for the
Committee to move expeditiously as I have described.
- 10 -
Conclusion
The past two years have been extraordinarily challenging for many Americans.
Two years ago, more than 20 million people were losing their jobs, millions were falling
ill, and lives were being disrupted. We have made enormous strides since then. Today,
as I have discussed, the labor market is very strong. But, to end where I began, inflation
is much too high. We have the necessary tools, and we will use them to restore price
stability.
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