Fed Chair Jerome Powell Warns: 'We May Be Entering A Period Of More Persistent Supply Shocks'

Forbes Breaking News

On Thursday, Federal Reserve Chair Jerome Powell delivered remarks at the Second Thomas Lauder Research Conference.

Transcript

00:00All right, good morning. Great, let's get started. Thank you so much for joining us

00:07this morning. My name is Trevor Reeve and I'm the Director of the Division of

00:11Monetary Affairs here at the Board. And on behalf of the Federal Reserve, let me

00:16welcome you to the second Thomas Laubach Research Conference. We established this

00:21conference to honor the legacy of Thomas Laubach, former Director of Monetary

00:27Affairs. As this room well knows, Thomas was a renowned economist, an influential

00:32policy advisor, as well as a close colleague and friend. I would especially

00:37like to acknowledge Thomas's wife, Taniyat, and his son, Laub, who are joining us here

00:42today. Thank you.

00:50This year's conference is a key element of the Federal Reserve's ongoing review of its

00:56monetary policy framework. And that is highly appropriate for this conference,

01:00given that Thomas played a critical role in the Fed's first framework review in

01:052019 and 2020. The research presented and discussed over the course of today and

01:11tomorrow will help inform the FOMC's discussions as the committee considers

01:16potential changes to its monetary policy strategy and communications. And we have

01:21the vast majority of the FOMC sitting right over here today. Let me extend our great

01:26appreciation to the paper authors, discussants, and panelists for investing their time and

01:31energy and sharing their insights with us. And let me thank all of you in attendance for

01:37contributing to what I'm sure will be a very engaging and productive conference. Before

01:43we turn it over to the chair, let me address just a few logistical items. For

01:49everyone's awareness, this conference is being live streamed on the board's website

01:53and YouTube channel, and the recording will be available for viewing later. Please keep

01:59this in mind when posing questions or making comments, and members of the press are

02:03here today as well. All of the conference materials, including the papers and the

02:08presentations, will be posted to the board's website. Each of our paper sessions will

02:13begin with a presentation by the author, followed by comments from a discussant, and

02:17then we'll open it up to the room for Q&A and discussion. Whenever making a

02:22comment or asking a question, please use a microphone so that people can hear you

02:27both in the room and importantly online. When you speak, please begin by introducing

02:33yourself, and please try to keep your remarks concise so we can create more

02:38opportunities for other people to participate. If you have any questions

02:42about anything related to today's conference, please find any of my

02:46colleagues around the room or outside who are wearing a white lanyard. They'd be

02:50happy to help you. And with that, let me get us started by introducing Federal Reserve

02:56Chair Jay Powell, who will offer opening remarks. Thank you.

03:03Thank you, Trevor, and good morning. I'd like to add my welcome to everyone. Thanks for

03:14being here. Thomas Laubach's research and his broader support of the FOMC helped us

03:20better understand monetary policy, and it is fitting that this work will continue

03:24today in his name. Thank you to the authors of the papers, to the discussants, and to

03:29our panel participants, and thank you also to Trevor and his team for organizing this

03:33conference. A whole lot of work went into bringing us together. As in our last review,

03:39the 2025 review consists of three key elements. This conference, Fed Listens events at the

03:46Reserve Banks around the country, and policy maker discussions and deliberations supported

03:51by staff analysis at a series of FOMC meetings. In the current review, we will reconsider aspects

03:57of our strategic framework in light of the experience of the last five years. We will also

04:02consider possible enhancements to the committee's policy communication tools regarding forecasts,

04:07uncertainty, and risks. In 2012, the FOMC first codified our monetary policy framework in a document

04:16entitled The Statement on Longer Run Goals and Monetary Policy Strategy, which we refer to as the

04:21consensus statement. The language in the opening paragraph, which has never changed, articulates

04:26our commitment to fulfilling our congressional mandate and to explaining clearly what we're doing

04:31and why. That clarity reduces uncertainty, improves the effectiveness of our policy, and enhances

04:38transparency and accountability. As chair, Ben Bernanke led the committee through the creation of that

04:44initial consensus statement, adopting a 2 percent inflation target, and outlining our approach

04:49to achieving our congressionally assigned dual mandate. The framework laid out in that document

04:54broadly aligned with best practices for a flexible inflation targeting central bank.

05:00The structure of the economy evolves over time, and monetary policy makers' strategies, tools,

05:05and communications need to evolve with it. The challenges presented by the Great Depression differ from

05:10those of the Great Inflation and the Great Moderation, which in turn differ from the ones we face today.

05:16A framework should be robust to a broad range of conditions, but also needs to be updated periodically

05:22as the economy and our understanding of it evolve. From 2012 to 2018, the FOMC voted at each

05:29January meeting to reaffirm the consensus statement in most years without substantive changes.

05:34In 2019, we changed that practice, conducting our first-ever public review, and said that we would repeat

05:41such reviews at roughly a five-year interval. There's nothing magic about a five-year pace.

05:47We believe that frequency is appropriate to reassess structural features of the economy,

05:52and to engage with the public, practitioners, and academics on the performance of our framework.

05:57Several of our global peers have adopted similar approaches to their framework reviews.

06:01At the time of the last review, we had been living for about a decade in a new normal,

06:07characterized by proximity to the effect of lower bound, with low interest rates, low growth,

06:12low inflation, and a very flat Phillips curve. If I could capture that era with one statistic,

06:18it would be that the policy rate had been stuck at the lower bound for seven long years,

06:23following the onset of the global financial crisis in late 2008. After liftoff in December 2015,

06:31we were able to raise the policy rate only very gradually over a period of three years,

06:36to a peak of just 2.4 percent. Seven months later, we began reducing it, leaving the rate at 1.6 percent

06:43in late 2019, where it would be when the pandemic arrived a few months later. Policy rates in other

06:50major advanced economies were even lower, in many cases below zero, and in all such economies,

06:56inflation regularly ran below its target. The sense at that time was that when the economy next

07:02experienced even a mild downturn, we would be right back at the lower bound, probably for another

07:08extended period. The post-financial crisis decade had demonstrated the pain that that could bring.

07:15Inflation would likely decline in a weak economy, raising real interest rates as nominal rates are

07:19pinned at zero. Higher real rates would further weigh on job growth and reinforce downward pressure on

07:26inflation and inflation expectations. Reflecting these concerns, we adopted a policy to make up for

07:32persistent shortfalls from the inflation target, an approach that was common in the extensive

07:36literature on the risks associated with the lower bound. Given the downside risks to employment and

07:42inflation from proximity to the lower bound, and the need to anchor longer-term inflation expectations

07:47at 2 percent, we said that following periods in which inflation has been running persistently below 2

07:53percent, we would likely aim to achieve inflation moderately above 2 percent for some time.

07:59We also concluded that policy decisions would be informed by assessments of shortfalls rather than

08:04deviations from maximum employment. The change to shortfalls was not a commitment to permanently

08:10foreswear preemption or to ignore labor market tightness. Rather, it signaled that apparent labor

08:16market tightness would not, in isolation, be enough to trigger a policy response, unless the committee

08:21believed that, if left unchecked, it would lead to unwelcome inflationary pressure. This change

08:28reflected our experience with long expansions that featured historically low unemployment amid low and

08:33stable inflation, suggesting that a policy approach that carefully probed for the maximum level of

08:39employment could bring about the benefits of a strong labor market without risking price stability.

08:45In the years just prior to the pandemic, for example, unemployment was at multi-decade lows,

08:50while inflation ran below 2 percent. By December 2019, estimates of the longer-run unemployment rate

08:57had fallen sharply. The use of shortfalls acknowledged that a combination of low inflation and low

09:03unemployment does not necessarily pose an adverse trade-off for monetary policy.

09:09The economic conditions that brought us closer to the lower bound and drove the changes in our consensus

09:14statement were thought to be rooted in slow-moving global factors that were likely to persist for an

09:18extended period, at least until our next five-year review. And that might well have been the case had the pandemic not intervened.

09:27The idea of an intentional moderate overshoot proved irrelevant to our policy discussions and has remained so

09:33through today. There was nothing intentional or moderate about the global inflation that arrived a

09:38few months after we announced our changes to the consensus statement, and I acknowledged as much publicly in December 2021.

09:46We fell back on the rest of the framework which called for traditional inflation targeting.

09:51Through the end of 2021, FOMC participants continued to forecast that inflation was likely to subside fairly

09:57quickly in 2022 with only a moderate increase in our policy rate. That projection was consistent with

10:03other central banks with different frameworks and the vast majority of forecasters. When the evidence showed

10:09otherwise, we hiked 525 basis points over a period of 16 months. The most recent data suggests that 12-month PCE

10:17inflation was 2.2 percent in April, far below its 7.2 percent peak in 2022. And in a welcome and

10:25historically unusual result, as this room knows, this disinflation has come without the sharp increase

10:31in unemployment that has often accompanied a campaign of rate hikes to reduce inflation.

10:36The economic environment has changed significantly since 2020, and our review will reflect our assessment

10:41of those changes. Longer-term interest rates are a good deal higher now, driven largely by real rates,

10:48given the stability of longer-term inflation expectations. Many estimates of the longer-run

10:53level of the policy rate have risen, including those in the summary of economic projections.

10:57Higher real rates may also reflect the possibility that inflation could be more volatile going forward

11:02than during the inter-crisis period of the 2010s. We may be entering a period of more frequent and

11:08potentially more persistent supply shocks, a difficult challenge for the economy and for central banks.

11:14While our policy rate is currently well above the lower bound, in recent decades we have cut the rate

11:19by about 500 basis points when the economy is in recession. Although getting stuck at the lower bound is

11:25no longer the base case, it is only prudent that the framework continue to address that risk.

11:29While the framework must evolve, some elements of it are timeless. Policymakers emerged from the

11:36great inflation with a clear understanding that it was essential to anchor inflation expectations

11:41at an appropriately low level. During the great moderation, well-anchored inflation expectations

11:47allowed us to provide policy support to employment without risking destabilizing inflation. Since the

11:53great inflation, the U.S. economy has had three of its four longest expansions on record, anchored

11:58expectations played a key role in facilitating these expansions. More recently, without that anchor,

12:04it would not have been possible to achieve a roughly five percentage point disinflation

12:08without a spike in unemployment. Keeping longer-run inflation expectations anchored was a driving force

12:15behind establishing the two percent target in the 2012 framework. Maintaining that anchor was a major

12:21consideration behind the changes in 2020. Anchored expectations are critical to everything we do,

12:26and we remain fully committed to the two percent target today. In the current review, the committee

12:32is engaged in discussions about what we have learned from the experience of the past five years.

12:36We plan to complete consideration of specific changes to the consensus statement in coming months.

12:42We're paying particular attention to the 2020 changes as we consider discrete but important updates

12:48reflecting what we have learned about the economy and the way those changes were interpreted by the

12:52public. In our discussion so far, participants have indicated that they thought it would be appropriate

12:58to reconsider the language around shortfalls. And at our meeting last week, we had a similar take

13:03on average inflation targeting. We will ensure that our new consensus statement is robust to a wide range of

13:09economic environments and developments. In addition to revising the consensus statement, we will also

13:15consider potential enhancements to our formal policy communications, particularly regarding the role of

13:21forecasts and uncertainty. As we have been reviewing assessments of the 2020 framework and of policy

13:27decisions in recent years, a common observation is the need for clear communications as complex events unfold.

13:34While academics and market participants generally have viewed the FOMC communications as effective,

13:40there is always room for improvement. Indeed, clear communication is an issue even in relatively placid times.

13:46A critical question is how to foster a broader understanding of the uncertainty that the economy generally faces.

13:53In periods with larger, more frequent, or more disparate shocks, effective communication requires that

13:58we convey the uncertainty that surrounds our understanding of the economy and the outlook. We will examine ways to

14:05improve along that dimension as we move forward. So let me end by saying thank you again for being here.

14:12We've been looking forward to us. All of us have been looking forward to being with you today and having these

14:17conversations that will occur over the next two days. These discussions will help broaden and deepen our

14:22thinking about these issues. And they're critical to the success of these reviews. Thank you very much.

14:39All right. Thank you very much. We are going to just roll right into our

14:43first paper session today. On the agenda today will be sessions that address the two sides of the

14:49Federal Reserve's dual mandate, employment and inflation, and also the strategies and tools

14:54used to pursue those goals. So I'm going to turn it over to my colleague Stephanie Aronson,

14:59who will moderate this panel. All right. Great to see everyone here this morning. I'm super excited to

15:21be kicking off the session. I'm Stephanie Aronson. I'm a senior associate director in the division of

15:27research and statistics. And I was told that I could say a few words.

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