For release on delivery
2:00 p.m. EST
November 9, 2023
Opening Remarks
by
Jerome H. Powell
Chair
Board of Governors of the Federal Reserve System
at
"Monetary Policy Challenges in a Global Economy," a policy panel at
the 24th Jacques Polak Annual Research Conference, hosted by
the International Monetary Fund
Washington, D.C.
November 9, 2023
Thank you for the opportunity to participate in today's panel discussion. My
assigned topic is U.S. monetary policy in the current global inflation episode. I will
briefly address the U.S. outlook and then turn to three broader questions raised by the
historic events of the pandemic era.
U.S. inflation has come down over the past year but remains well above our
2 percent target (figure 1).1 My colleagues and I are gratified by this progress but expect
that the process of getting inflation sustainably down to 2 percent has a long way to go.
The labor market remains tight, although improvements in labor supply and a gradual
easing in demand continue to move it into better balance.2 Gross domestic product
growth in the third quarter was quite strong, but, like most forecasters, we expect growth
to moderate in coming quarters. Of course, that remains to be seen, and we are attentive
to the risk that stronger growth could undermine further progress in restoring balance to
the labor market and in bringing inflation down, which could warrant a response from
monetary policy. The Federal Open Market Committee (FOMC) is committed to
achieving a stance of monetary policy that is sufficiently restrictive to bring inflation
down to 2 percent over time; we are not confident that we have achieved such a stance.
We know that ongoing progress toward our 2 percent goal is not assured: Inflation has
1
Inflation under our preferred measure, the 12-month change in the total personal consumption
expenditures (PCE) price index, has declined from 6.6 percent in September 2022 to 3.4 percent in
September 2023. The 12-month change in the core PCE measure, which excludes the volatile food and
energy prices and therefore may provide a better signal of where inflation is headed, has declined from 5.5
percent in September 2022 to 3.7 percent in September 2023.
2
The labor force participation rate has moved up since late last year, particularly for individuals aged 25 to
54 years, where that rate has increased by nearly 1 percentage point, on net, since December. Private
payrolls increased by an average of 191,000 per month over the 12 months ending in October 2023, down
from a rate of 435,000 per month over the 12 months ending in October 2022. Meanwhile, both the quits
rate and the wage premium for job switchers have returned to their pre-pandemic ranges. And while they
remain above a level that would be consistent with 2 percent inflation in the longer run, broad indicators of
12-month wage growth continue to trend lower.
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given us a few head fakes. If it becomes appropriate to tighten policy further, we will not
hesitate to do so. We will continue to move carefully, however, allowing us to address
both the risk of being misled by a few good months of data, and the risk of
overtightening. We are making decisions meeting by meeting, based on the totality of the
incoming data and their implications for the outlook for economic activity and inflation,
as well as the balance of risks, determining the extent of additional policy firming that
may be appropriate to return inflation to 2 percent over time. We will keep at it until the
job is done.
With that, I will turn to three questions that have arisen from the receding but still
elevated inflation we are experiencing today. The first question is, with the benefit of
2-1/2 years to look back, what we can say about the initial causes and ongoing policy
implications of the current inflation.
After running below our 2 percent target over the first year of the pandemic, core
PCE (personal consumption expenditures) inflation rose sharply in March 2021.
Economic forecasters generally did not see this coming, as shown by the February 2021
Survey of Professional Forecasters, which showed core PCE inflation running at or below
target over the subsequent three years.3 The real-time questions for policymakers were
what caused the high inflation and how policy should react. At the outset, many
forecasters and analysts, including FOMC participants, viewed the sudden upturn in
inflation as mostly a function of pandemic-related shifts in the composition of demand, a
disruption of supply chains, and a sharp decline in labor supply. The resulting supply and
demand imbalances led to large increases in the prices of a range of items most directly
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affected by the pandemic, especially goods. In this view, as the pandemic abated, our
dynamic and flexible economy was likely to adapt fairly quickly. Supply disruptions and
shortages would diminish. Labor supply would rebound, aided by the arrival of vaccines
and the reopening of schools. Elevated demand for goods would shift back to services.
Inflation would ease reasonably quickly without the need for a significant policy
response.4
Indeed, although monthly core PCE inflation spiked in March and April of 2021,
beginning in May it declined for five consecutive months, providing some support for
this view (figure 2). But in the fourth quarter of 2021, the data clearly changed amid
waves of new COVID-19 variants, with only gradual progress in restoring global supply
chains, and relatively few workers rejoining the labor force. That lack of progress,
combined with very strong demand from households, contributed to a tight economy and
a historically tight labor market, and more persistent high inflation.
The Committee signaled a change in our policy approach, and financial conditions
began to tighten. A new shock arrived in February 2022, when Russia invaded Ukraine,
resulting in a sharp increase in energy and other commodity prices. When we lifted off in
March, it was clear that bringing down inflation would depend both on the unwinding of
the unprecedented pandemic-related demand and supply distortions and on our tightening
of monetary policy, which would slow the growth of aggregate demand, allowing supply
time to catch up. Today, these two processes are working together to bring inflation
down. The FOMC has raised the federal funds rate target range by 5-1/4 percentage
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points and reduced our securities holdings by more than $1 trillion. Monetary policy is in
restrictive territory and putting downward pressure on demand and inflation.
The unwinding of pandemic-related supply and demand distortions is playing an
important role in the decline of inflation. For example, wage growth has steadily fallen
by most measures since mid-2022 (figure 3), despite continued robust job gains,
reflecting a resurgence in labor supply thanks to higher labor force participation and a
return of immigration to pre-pandemic levels.
While the broader supply recovery continues, it is not clear how much more will
be achieved by additional supply-side improvements. Going forward, it may be that a
greater share of the progress in reducing inflation will have to come from tight monetary
policy restraining the growth of aggregate demand.5
Turning to my second question, for many years, it has been generally thought that
monetary policy should limit its response to, or "look through," supply shocks to the
extent that they are temporary and idiosyncratic.6 Many argue as well that, in the future,
supply disruptions are likely to be more frequent or more persistent than in the decades
just before the pandemic.7 A second question, then, is what we have learned about the
standard "looking through" approach.
The idea that the response to the inflationary effects of supply shocks should be
attenuated arises, in part, from the tradeoff presented by those shocks. Supply shocks
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tend to move prices and employment in opposite directions, whereas monetary policy
pushes each in the same direction. Therefore, the response of monetary policy to higher
prices stemming from an adverse supply shock should be attenuated because it would
otherwise amplify the unwanted decline in employment.8 In addition, supply shocks
have most frequently come from the volatile food and energy categories and have passed
quickly. While food and energy prices critically affect the budgets of households and
businesses, the policy tools of central banks work more slowly than commodity markets
move. Responding aggressively to quickly passing price increases could exacerbate
macroeconomic volatility without supporting price stability.
Our experience since 2020 highlights some limits of that thinking. To begin with,
it can be challenging to disentangle supply shocks from demand shocks in real time, and
also to determine how long either will persist, particularly in the extraordinary
circumstances of the past three years. Supply shocks that have a persistent effect on
potential output could call for restrictive policy to better align aggregate demand with the
suppressed level of aggregate supply. The sequence of shocks to global supply chains
experienced from 2020 to 2022 suppressed output for a considerable time and may have
persistently altered global supply dynamics. Such a sequence calls on policymakers to
use policy restraint to limit inflationary effects.
Policy restraint in this case is also good risk management. Supply shocks that
drive inflation high enough for long enough can affect the longer-term inflation
expectations of households and businesses. Monetary policy must forthrightly address
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any risks of a potential de-anchoring of inflation expectations, as well-anchored
expectations help facilitate bringing inflation back to our target. The sharp policy
tightening during 2022 likely contributed to keeping inflation expectations well anchored.
My third question is the level where interest rates will settle once the effects of
the pandemic are truly behind us. By 2019, the general level of nominal interest rates had
declined steadily over several decades (figure 4). As the pandemic arrived, many
advanced economies had below-target inflation and low or mildly negative policy rates,
raising difficult questions about the efficacy of interest rate policy when constrained by
the effective lower bound (ELB). Over two decades, an extensive literature had
identified a number of possible changes to the widely used inflation-targeting regime,
including negative policy rates, nominal income targeting, and various forms of makeup
strategies under which persistent shortfalls in inflation would be followed by a period of
inflation running moderately above 2 percent.9 Today, inflation and policy rates are
elevated, and the ELB is not currently relevant for our policy decisions. But it is too soon
9
A number of these topics were discussed in the analytical work supporting the 2019-20 framework
review; see Board of Governors of the Federal Reserve System (2020), "Review of Monetary Policy
Strategy, Tools, and Communications," webpage,
https://www.federalreserve.gov/monetarypolicy/reviewof-monetary-policy-strategy-tools-and-communications.htm. For a discussion of the effect of the ELB on
monetary policy strategy, see Fernando Duarte, Benjamin K. Johannsen, Leonardo Melosi, and Taisuke
Nakata (2020), "Strengthening the FOMC's Framework in View of the Effective Lower Bound and Some
Considerations Related to Time-Inconsistent Strategies," Finance and Economics Discussion Series
2020067 (Washington: Board of Governors of the Federal Reserve System, August),
https://doi.org/10.17016/FEDS.2020.067. For additional information about the efficacy and use of certain
policy tools in this environment, see Jonas Arias, Martin Bodenstein, Hess Chung, Thorsten Drautzburg,
and Andrea Raffo (2020), "Alternative Strategies: How Do They Work? How Might They Help?" Finance
and Economics Discussion Series 2020-068 (Washington: Board of Governors of the Federal Reserve
System, August), https://doi.org/10.17016/FEDS.2020.068; Jeffrey Campbell, Thomas B. King, Anna
Orlik, and Rebecca Zarutskie (2020), "Issues regarding the Use of the Policy Rate Tool," Finance and
Economics Discussion
Series 2020-070 (Washington: Board of Governors of the Federal Reserve System, August),
https://doi.org/10.17016/FEDS.2020.070; and Mark Carlson, Stefania D'Amico, Cristina Fuentes-Albero,
Bernd Schlusche, and Paul Wood (2020), "Issues in the Use of the Balance Sheet Tool," Finance and
Economics Discussion Series 2020-071 (Washington: Board of Governors of the Federal Reserve System,
August), https://doi.org/10.17016/FEDS.2020.071.
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to say whether the monetary policy challenges of the ELB will ultimately turn out to be a
thing of the past.
The prolonged proximity of interest rates to the ELB was at the heart of the
monetary policy review and the changes we made to our framework in 2020. We will
begin our next five-year review in the latter half of 2024 and announce the results about a
year later. Among the questions we will consider is the degree to which the structural
features of the economy that led to low interest rates in the pre-pandemic era will persist.
With time, we will continue to learn from the experience of the past few years, and what
implications it may hold for monetary policy.
These are just three of the many questions raised by these challenging times, and
we are far from a complete understanding of the answers. I appreciate the opportunity to
discuss these issues with you today and look forward to our conversation.
Opening Remarks
Jerome H. Powell
Chair
Board of Governors of the Federal Reserve System
at
"Monetary Policy Challenges in a Global Economy," a
policy panel at
the 24th Jacques Polak Annual Research Conference, hosted by
the International Monetary Fund
November 9, 2023