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At Jackson Hole

Jerome Powell · the Jackson Hole symposium, Wyoming · August 26, 2022
text: the Federal Reserve · a work of a United States government officer, in the public domain
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Thank you for the opportunity to speak here today.

At past Jackson Hole conferences, I have discussed broad topics such as the ever-changing structure of the economy and the challenges of conducting monetary policy under high uncertainty. Today, my remarks will be shorter, my focus narrower, and my message more direct.

The Federal Open Market Committee's (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all. The burdens of high inflation fall heaviest on those who are least able to bear them.

Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

The U.S. economy is clearly slowing from the historically high growth rates of 2021, which reflected the reopening of the economy following the pandemic recession. While the latest economic data have been mixed, in my view our economy continues to show strong underlying momentum. The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers. Inflation is running well above 2 percent, and high inflation has continued to spread through the economy. While the lower inflation readings for July are welcome, a single month's improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down.

We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent. At our most recent meeting in July, the FOMC raised the target range for the federal funds rate to 2.25 to 2.5 percent, which is in the Summary of Economic Projection's (SEP) range of estimates of where the federal funds rate is projected to settle in the longer run. In current circumstances, with inflation running far above 2 percent and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause.

July's increase in the target range was the second 75 basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting. We are now about halfway through the intermeeting period. Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook. At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.

Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy. Committee participants' most recent individual projections from the June SEP showed the median federal funds rate running slightly below 4 percent through the end of 2023. Participants will update their projections at the September meeting.

Our monetary policy deliberations and decisions build on what we have learned about inflation dynamics both from the high and volatile inflation of the 1970s and 1980s, and from the low and stable inflation of the past quarter-century. In particular, we are drawing on three important lessons.

The first lesson is that central banks can and should take responsibility for delivering low and stable inflation. It may seem strange now that central bankers and others once needed convincing on these two fronts, but as former Chairman Ben Bernanke has shown, both propositions were widely questioned during the Great Inflation period. Today, we regard these questions as settled. Our responsibility to deliver price stability is unconditional. It is true that the current high inflation is a global phenomenon, and that many economies around the world face inflation as high or higher than seen here in the United States. It is also true, in my view, that the current high inflation in the United States is the product of strong demand and constrained supply, and that the Fed's tools work principally on aggregate demand. None of this diminishes the Federal Reserve's responsibility to carry out our assigned task of achieving price stability. There is clearly a job to do in moderating demand to better align with supply. We are committed to doing that job.

The second lesson is that the public's expectations about future inflation can play an important role in setting the path of inflation over time. Today, by many measures, longer-term inflation expectations appear to remain well anchored. That is broadly true of surveys of households, businesses, and forecasters, and of market-based measures as well. But that is not grounds for complacency, with inflation having run well above our goal for some time.

If the public expects that inflation will remain low and stable over time, then, absent major shocks, it likely will. Unfortunately, the same is true of expectations of high and volatile inflation. During the 1970s, as inflation climbed, the anticipation of high inflation became entrenched in the economic decisionmaking of households and businesses. The more inflation rose, the more people came to expect it to remain high, and they built that belief into wage and pricing decisions. As former Chairman Paul Volcker put it at the height of the Great Inflation in 1979, "Inflation feeds in part on itself, so part of the job of returning to a more stable and more productive economy must be to break the grip of inflationary expectations."

One useful insight into how actual inflation may affect expectations about its future path is based in the concept of "rational inattention." When inflation is persistently high, households and businesses must pay close attention and incorporate inflation into their economic decisions. When inflation is low and stable, they are freer to focus their attention elsewhere. Former Chairman Alan Greenspan put it this way: "For all practical purposes, price stability means that expected changes in the average price level are small enough and gradual enough that they do not materially enter business and household financial decisions."

Of course, inflation has just about everyone's attention right now, which highlights a particular risk today: The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.

That brings me to the third lesson, which is that we must keep at it until the job is done. History shows that the employment costs of bringing down inflation are likely to increase with delay, as high inflation becomes more entrenched in wage and price setting. The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.

These lessons are guiding us as we use our tools to bring inflation down. We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.

The divergences

"Today, my remarks will be shorter, my focus narrower, and my message more direct" — the symposium files an Assertion about the morning's programme; the rates desk files a Counter-signal and prices the refusal before any content arrives. They part on function. Jackson Hole trades in range, and the sentence before this one names the speaker's own past contributions to it, "the ever-changing structure of the economy." Under nine minutes at a venue whose custom runs long is a filing in itself. The archive's other economy pages move their audiences by teaching: Roosevelt opens the first fireside chat proposing to explain banking "with the comparatively few who understand the mechanics of banking but more particularly with the overwhelming majority who use banks," and Bush opens the September 2008 crisis address with "First, how did our economy reach this point?" This speech opens by announcing that there will be less of it.

"We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent" — dealers file a Promise and reprice the terminal rate; the Committee files an Assertion about a direction already being travelled, since the level is fixed by a vote and this speech makes September contingent on data that has not arrived. They part on function, and the text supports both: the commitment sits in a present progressive, which describes rather than pledges, and the arithmetic that would pin it down is relayed from other participants' projections. Equity markets fell more than three percent in the hours after the words were filed.

"They will also bring some pain to households and businesses" — the Committee files an Assertion, a forecast of side effects; a household files a cost imposed by the body announcing it. They part on motive: whether the missing agent is compression or the point. The Committee is the grammatical subject of every other action in the speech — "the FOMC raised the target range," "We are moving our policy stance," "We are taking forceful and rapid steps" — and in this clause the interest rates act alone. Roosevelt in 1933 gave the losses a named class of author, "Some of our bankers had shown themselves either incompetent or dishonest in their handling of the people's funds." Here the pain has no author at all, and it is the speaker's own.

"The burdens of high inflation fall heaviest on those who are least able to bear them" — read as a claim about who an inflation hurts, an Assertion the room agrees with; read against "there will very likely be some softening of labor market conditions" three sentences later, a Frame-set that assigns the moral warrant before the bill is presented, since the households least able to bear an inflation are the households first out of work in a disinflation. They part on target: the world, or the frame inside which the costs will be weighed. The speech never joins the two sentences, and both filings survive because it does not.

"A single month's improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down" — read narrow, a caution about the statistical properties of one monthly print; read wide, the criterion for the whole cycle is moved off the data and onto a state of mind. They part on scope. Every position taken on the July reading had been placed on the narrow filing, and the sentence exists to close them. The speech's last line confirms which filing governs: "until we are confident the job is done."

"Today, we regard these questions as settled" — a central banker files an Assertion about a professional consensus; the conference, whose business is unsettling questions, files a Frame-set delivered from the chair. They part on orientation: whether the sentence is keyed to what changed the profession's mind or to who is now placed to declare it changed. The warrant offered in the sentence before it is a predecessor, "as former Chairman Ben Bernanke has shown"; the sentences after it grant the two strongest objections and rule them out of order.

"We will keep at it until we are confident the job is done" — read narrow, the job is the 2 percent goal named at the top of the speech, and the promise has an end anyone can check; read wide, it is the job Volcker named in the quotation this speech supplies, "to break the grip of inflationary expectations," which no series measures and no date closes. They part on scope, and the word carries the entire commitment: it occurs five times in the text and never once means employment.