For release on delivery
10:00 a.m. EDT (8:00 a.m. MDT)
August 27, 2021
Monetary Policy in the Time of COVID
Remarks by
Jerome H. Powell
Chair
Board of Governors of the Federal Reserve System
at
"Macroeconomic Policy in an Uneven Economy," an economic policy
symposium sponsored by the Federal Reserve Bank of Kansas City
Jackson Hole, Wyoming
(via webcast)
August 27, 2021
Seventeen months have passed since the U.S. economy faced the full force of the
COVID-19 pandemic. This shock led to an immediate and unprecedented decline as
large parts of the economy were shuttered to contain the spread of the disease.
The path of recovery has been a difficult one, and a good place to begin is by
thanking those on the front line fighting the pandemic: the essential workers who kept
the economy going, those who have cared for others in need, and those in medical
research, business, and government, who came together to discover, produce, and widely
distribute effective vaccines in record time. We should also keep in our thoughts those
who have lost their lives from COVID, as well as their loved ones.
Strong policy support has fueled a vigorous but uneven recovery-one that is, in
many respects, historically anomalous. In a reversal of typical patterns in a downturn,
aggregate personal income rose rather than fell, and households massively shifted their
spending from services to manufactured goods. Booming demand for goods and the
strength and speed of the reopening have led to shortages and bottlenecks, leaving the
COVID-constrained supply side unable to keep up. The result has been elevated inflation
in durable goods-a sector that has experienced an annual inflation rate well below zero
over the past quarter century.1 Labor market conditions are improving but turbulent, and
the pandemic continues to threaten not only health and life, but also economic activity.
Many other advanced economies are experiencing similarly unusual conditions.
In my comments today, I will focus on the Fed's efforts to promote our maximum
employment and price stability goals amid this upheaval, and suggest how lessons from
- 2 -
history and a careful focus on incoming data and the evolving risks offer useful guidance
for today's unique monetary policy challenges.
The Recession and Recovery So Far
The pandemic recession-the briefest yet deepest on record-displaced roughly
30 million workers in the space of two months.2 The decline in output in the second
quarter of 2020 was twice the full decline during the Great Recession of 2007-09.3 But
the pace of the recovery has exceeded expectations, with output surpassing its previous
peak after only four quarters, less than half the time required following the Great
Recession. As is typically the case, the recovery in employment has lagged that in
output; nonetheless, employment gains have also come faster than expected.4
The economic downturn has not fallen equally on all Americans, and those least
able to shoulder the burden have been hardest hit. In particular, despite progress,
joblessness continues to fall disproportionately on lower-wage workers in the service
sector and on African Americans and Hispanics.
The unevenness of the recovery can further be seen through the lens of the
sectoral shift of spending into goods-particularly durable goods such as appliances,
furniture, and cars-and away from services, particularly in-person services in areas such
as travel and leisure (figure 1). As the pandemic struck, restaurant meals fell 45 percent,
air travel 95 percent, and dentist visits 65 percent. Even today, with overall gross
- 3 -
domestic product and consumption spending more than fully recovered, services
spending remains about 7 percent below trend. Total employment is now 6 million
below its February 2020 level, and 5 million of that shortfall is in the still-depressed
service sector. In contrast, spending on durable goods has boomed since the start of the
recovery and is now running about 20 percent above the pre-pandemic level. With
demand outstripping pandemic-afflicted supply, rising durables prices are a principal
factor lifting inflation well above our 2 percent objective.
Given the ongoing upheaval in the economy, some strains and surprises are
inevitable. The job of monetary policy is to promote maximum employment and price
stability as the economy works through this challenging period. I will turn now to a
discussion of progress toward those goals.
The Path Ahead: Maximum Employment
The outlook for the labor market has brightened considerably in recent months.
After faltering last winter, job gains have risen steadily over the course of this year and
now average 832,000 over the past three months, of which almost 800,000 have been in
services (figure 2). The pace of total hiring is faster than at any time in the recorded data
before the pandemic. The levels of job openings and quits are at record highs, and
employers report that they cannot fill jobs fast enough to meet returning demand.
These favorable conditions for job seekers should help the economy cover the
considerable remaining ground to reach maximum employment. The unemployment rate
has declined to 5.4 percent, a post-pandemic low, but is still much too high, and the
reported rate understates the amount of labor market slack.5 Long-term unemployment
- 4 -
remains elevated, and the recovery in labor force participation has lagged well behind the
rest of the labor market, as it has in past recoveries.
With vaccinations rising, schools reopening, and enhanced unemployment
benefits ending, some factors that may be holding back job seekers are likely fading.6
While the Delta variant presents a near-term risk, the prospects are good for continued
progress toward maximum employment.
The Path Ahead: Inflation
The rapid reopening of the economy has brought a sharp run-up in inflation. Over
the 12 months through July, measures of headline and core personal consumption
expenditures inflation have run at 4.2 percent and 3.6 percent, respectively-well above
our 2 percent longer-run objective.7 Businesses and consumers widely report upward
pressure on prices and wages. Inflation at these levels is, of course, a cause for concern.
But that concern is tempered by a number of factors that suggest that these elevated
readings are likely to prove temporary. This assessment is a critical and ongoing one,
and we are carefully monitoring incoming data.
The dynamics of inflation are complex, and we assess the inflation outlook from a
number of different perspectives, as I will now discuss.
- 5 -
1. The absence so far of broad-based inflation pressures
The spike in inflation is so far largely the product of a relatively narrow group of
goods and services that have been directly affected by the pandemic and the reopening of
the economy. Durable goods alone contributed about 1 percentage point to the latest
12-month measures of headline and core inflation. Energy prices, which rebounded with
the strong recovery, added another 0.8 percentage point to headline inflation, and from
long experience we expect the inflation effects of these increases to be transitory. In
addition, some prices-for example, for hotel rooms and airplane tickets-declined
sharply during the recession and have now moved back up close to pre-pandemic levels.
The 12-month window we use in computing inflation now captures the rebound in prices
but not the initial decline, temporarily elevating reported inflation. These effects, which
are adding a few tenths to measured inflation, should wash out over time.
We consult a range of measures meant to capture whether price increases for
particular items are spilling over into broad-based inflation. These include trimmed mean
measures and measures excluding durables and computed from just before the pandemic.
These measures generally show inflation at or close to our 2 percent longer-run objective
(figure 3). We would be concerned at signs that inflationary pressures were spreading
more broadly through the economy.
2. Moderating inflation in higher-inflation items
We are also directly monitoring the prices of particular goods and services most
affected by the pandemic and the reopening, and are beginning to see a moderation in
some cases as shortages ease. Used car prices, for example, appear to have stabilized;
indeed, some price indicators are beginning to fall. If that continues, as many analysts
- 6 -
predict, then used car prices will soon be pulling measured inflation down, as they did for
much of the past decade.8
This same dynamic of upward inflation pressure dissipating and, in some cases,
reversing seems likely to play out in durables more generally. Over the 25 years
preceding the pandemic, durables prices actually declined, with inflation averaging
negative 1.9 percent per year (figure 5).9 As supply problems have begun to resolve,
inflation in durable goods other than autos has now slowed and may be starting to fall. It
seems unlikely that durables inflation will continue to contribute importantly over time to
overall inflation. We will be looking for evidence that supports or undercuts that
expectation.
3. Wages
We also assess whether wage increases are consistent with 2 percent inflation
over time. Wage increases are essential to support a rising standard of living and are
generally, of course, a welcome development. But if wage increases were to move
materially and persistently above the levels of productivity gains and inflation, businesses
would likely pass those increases on to customers, a process that could become the sort of
"wage-price spiral" seen at times in the past.10 Today we see little evidence of wage
increases that might threaten excessive inflation (figure 6). Broad-based measures of
wages that adjust for compositional changes in the labor force, such as the employment
- 7 -
cost index and the Atlanta Wage Growth Tracker, show wages moving up at a pace that
appears consistent with our longer-term inflation objective. We will continue to monitor
this carefully.
4. Longer-term inflation expectations
Policymakers and analysts generally believe that, as long as longer-term inflation
expectations remain anchored, policy can and should look through temporary swings in
inflation. Our monetary policy framework emphasizes that anchoring longer-term
expectations at 2 percent is important for both maximum employment and price stability.
We carefully monitor a wide range of indicators of longer-term inflation
expectations. These measures today are at levels broadly consistent with our 2 percent
objective (figure 4). Because measures of inflation expectations are individually noisy,
we also focus on common patterns across the measures. One approach to summarizing
these patterns is the Board staff's index of common inflation expectations (CIE), which
combines information from a broad range of survey and market-based measures.11 This
index captures a general move down in expectations starting around 2014, a time when
inflation was running persistently below 2 percent. More recently, the index shows a
welcome reversal of that decline and is now at levels more consistent with our 2 percent
objective.
Longer-term inflation expectations have moved much less than actual inflation or
near-term expectations, suggesting that households, businesses, and market participants
- 8 -
also believe that current high inflation readings are likely to prove transitory and that, in
any case, the Fed will keep inflation close to our 2 percent objective over time.12
5. The prevalence of global disinflationary forces over the past quarter century
Finally, it is worth noting that, since the 1990s, inflation in many advanced
economies has run somewhat below 2 percent even in good times (figure 7). The pattern
of low inflation likely reflects sustained disinflationary forces, including technology,
globalization and perhaps demographic factors, as well as a stronger and more successful
commitment by central banks to maintain price stability.13 In the United States,
unemployment ran below 4 percent for about two years before the pandemic, while
inflation ran at or below 2 percent. Wages did move up across the income spectrum-a
welcome development-but not by enough to lift price inflation consistently to 2 percent.
While the underlying global disinflationary factors are likely to evolve over time, there is
little reason to think that they have suddenly reversed or abated. It seems more likely that
they will continue to weigh on inflation as the pandemic passes into history.14
We will continue to monitor incoming inflation data against each of these
assessments.
To sum up, the baseline outlook is for continued progress toward maximum
employment, with inflation returning to levels consistent with our goal of inflation
12
On a Q4-over-Q4 basis, the August 13, 2021, Survey of Professional Forecasters reports a consensus
forecast for total personal consumption expenditures inflation of 4.1 percent, 2.2 percent, and 2.3 percent
for 2021 to 2023, respectively. The corresponding numbers for core inflation are 3.7 percent, 2.2 percent,
and 2.1 percent, respectively. The August 10, 2021, Blue Chip Economic Indicators Forecast presents
similar consensus forecasts for 2021 and 2022.
13
For views on this, see Canon, Kudlyak, and Reed (2015), Forbes (2019), Goodhart and Pradhan (2020),
Obstfeld (2020).
14
For an opposing view, see Goodhart and Pradhan (2020), who argue that the globalization and
demographic factors that had been fueling global disinflationary forces are now reversing and could give
rise to an inflationary period. Even if we are near an inflection point, as Goodhart and Pradhan argue,
demographic forces move slowly relative to the near-term policy horizon I am discussing here today.
- 9 -
averaging 2 percent over time. Let me now turn to how the baseline outlook and the
associated risks and uncertainties figure in our monetary policymaking.
Implications for Monetary Policy
The period from 1950 through the early 1980s provides two important lessons for
managing the risks and uncertainties we face today. The early days of stabilization
policy in the 1950s taught monetary policymakers not to attempt to offset what are likely
to be temporary fluctuations in inflation.15 Indeed, responding may do more harm than
good, particularly in an era where policy rates are much closer to the effective lower
bound even in good times. The main influence of monetary policy on inflation can come
after a lag of a year or more. If a central bank tightens policy in response to factors that
turn out to be temporary, the main policy effects are likely to arrive after the need has
passed. The ill-timed policy move unnecessarily slows hiring and other economic
activity and pushes inflation lower than desired. Today, with substantial slack remaining
in the labor market and the pandemic continuing, such a mistake could be particularly
harmful. We know that extended periods of unemployment can mean lasting harm to
workers and to the productive capacity of the economy.16
History also teaches, however, that central banks cannot take for granted that
inflation due to transitory factors will fade. The 1970s saw two periods in which there
were large increases in energy and food prices, raising headline inflation for a time. But
when the direct effects on headline inflation eased, core inflation continued to run
persistently higher than before. One likely contributing factor was that the public had
come to generally expect higher inflation-one reason why we now monitor inflation
expectations so carefully.17
Central banks have always faced the problem of distinguishing transitory inflation
spikes from more troublesome developments, and it is sometimes difficult to do so with
confidence in real time. At such times, there is no substitute for a careful focus on
incoming data and evolving risks. If sustained higher inflation were to become a serious
concern, the Federal Open Market Committee (FOMC) would certainly respond and use
our tools to assure that inflation runs at levels that are consistent with our goal.
Incoming data should provide more evidence that some of the supply-demand
imbalances are improving, and more evidence of a continued moderation in inflation,
particularly in goods and services prices that have been most affected by the pandemic.
We also expect to see continued strong job creation. And we will be learning more about
the Delta variant's effects. For now, I believe that policy is well positioned; as always,
we are prepared to adjust policy as appropriate to achieve our goals.
That brings me to a concluding word on the path ahead for monetary policy. The
Committee remains steadfast in our oft-expressed commitment to support the economy
for as long as is needed to achieve a full recovery. The changes we made last year to our
Statement on Longer-Run Goals and Monetary Policy Strategy are well suited to address
today's challenges.
We have said that we would continue our asset purchases at the current pace until
we see substantial further progress toward our maximum employment and price stability
goals, measured since last December, when we first articulated this guidance. My view is
that the "substantial further progress" test has been met for inflation. There has also been
clear progress toward maximum employment. At the FOMC's recent July meeting, I was
of the view, as were most participants, that if the economy evolved broadly as
anticipated, it could be appropriate to start reducing the pace of asset purchases this year.
The intervening month has brought more progress in the form of a strong employment
report for July, but also the further spread of the Delta variant. We will be carefully
assessing incoming data and the evolving risks. Even after our asset purchases end, our
elevated holdings of longer-term securities will continue to support accommodative
financial conditions.
The timing and pace of the coming reduction in asset purchases will not be
intended to carry a direct signal regarding the timing of interest rate liftoff, for which we
have articulated a different and substantially more stringent test. We have said that we
will continue to hold the target range for the federal funds rate at its current level until the
economy reaches conditions consistent with maximum employment, and inflation has
reached 2 percent and is on track to moderately exceed 2 percent for some time. We have
much ground to cover to reach maximum employment, and time will tell whether we
have reached 2 percent inflation on a sustainable basis.
These are challenging times for the public we serve, as the pandemic and its
unprecedented toll on health and economic activity linger. But I will end on a positive
note. Before the pandemic, we all saw the extraordinary benefits that a strong labor
market can deliver to our society. Despite today's challenges, the economy is on a path
to just such a labor market, with high levels of employment and participation, broadly
shared wage gains, and inflation running close to our price stability goal.
Thank you very much.
References
Bodenstein, Martin, Christopher J. Erceg, and Luca Guerrieri (2008). "Optimal
Monetary Policy with Distinct Core and Headline Inflation Rates," Journal of
Monetary Economics, vol. 55, supplement (October), pp. S18-S33.
Bordo, Michael D., and Athanasios Orphanides, eds. (2013). The Great Inflation: The
Rebirth of Modern Central Banking. Chicago: University of Chicago Press.
Canon, Maria E., Marianna Kudlyak, and Marisa Reed (2015). "Aging and the
Economy: The Japanese Experience," Federal Reserve Bank of St. Louis,
Regional Economist, vol. 23 (October), pp. 12-13,
https://www.stlouisfed.org/publications/regional-economist/october-2015/agingand-the-economy-the-japanese-experience.
Davis, Steven J., and Till von Wachter (2011). "Recessions and the Costs of Job Loss,"
Brookings Papers on Economic Activity, Fall, pp. 1-72,
https://www.brookings.edu/wp-content/uploads/2011/09/2011b_bpea_davis.pdf.
Forbes, Kristin J. (2019). "Inflation Dynamics: Dead, Dormant, or Determined
Abroad?" Brookings Papers on Economic Activity, Fall, pp. 257-319,
https://www.brookings.edu/wp-content/uploads/2020/10/Forbes-final-draft.pdf.
Friedman, Milton (1958). "The Supply of Money and Changes in Prices and Output," in
The Relationship of Prices to Economic Stability and Growth: Compendium of
Papers Submitted by Panelists Appearing before the Joint Economic Committee,
Joint Committee Print, March 31, 85 Cong. Washington: Government Printing
Office, pp. 241-56.
Goodhart, Charles, and Manoj Pradhan (2020). The Great Demographic Reversal:
Ageing Societies, Waning Inequality, and an Inflation Revival. Cham,
Switzerland: Palgrave Macmillan.
Mishkin, Frederic S. (2007). "Headline versus Core Inflation in the Conduct of Monetary
Policy," speech delivered at the Business Cycles, International Transmission and
Macroeconomic Policies Conference, HEC Montreal, Montreal, October 20,
https://www.federalreserve.gov/newsevents/speech/mishkin20071020a.htm.
Obstfeld, Maurice (2020). "Global Dimensions of U.S. Monetary Policy," International
Journal of Central Banking, vol. 16 (February), pp. 73-132.
Orphanides, Athanasios, and John C. Williams (2013). "Monetary Policy Mistakes and
the Evolution of Inflation Expectations," in Michael D. Bordo and Athanasios
Orphanides, eds., The Great Inflation: The Rebirth of Modern Central Banking.
Chicago: University of Chicago Press, pp. 255-88.
Powell, Jerome H. (2019). "Challenges for Monetary Policy," speech delivered at
"Challenges for Monetary Policy," a symposium sponsored by the Federal
Reserve Bank of Kansas City, held in Jackson Hole, Wyo., August 23,
https://www.federalreserve.gov/newsevents/speech/powell20190823a.htm.
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