- 5 months ago
Federal Reserve Chair Jerome Powell on Friday signaled openness to possible interest rate cuts in his final appearance at the Fed’s annual symposium in Jackson Hole, Wyoming.
READ MORE: https://www.forbes.com/sites/tylerroush/2025/08/22/powell-says-conditions-may-warrant-interest-rate-cut-in-jackson-hole-speech-live-updates/
READ MORE: https://www.forbes.com/sites/tylerroush/2025/08/22/powell-says-conditions-may-warrant-interest-rate-cut-in-jackson-hole-speech-live-updates/
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00:00somewhat elevated, has come down a great deal from its post-pandemic highs.
00:05At the same time, the balance of risks appears to be shifting.
00:09In my remarks today, I will first address the current economic situation and the near-term
00:14outlook for monetary policy. I will then turn to the results of our second public review of
00:19our monetary policy framework, as captured in the revised statement on longer-run goals
00:25in monetary policy strategy that we released today. When I appeared at this podium one year ago,
00:31the economy was at an inflection point. Our policy rate had stood at 5.25% to 5.5% for more than a
00:39year. That restrictive policy stance was appropriate to help bring down inflation and to foster a
00:45sustainable balance between aggregate demand and supply. Inflation had moved much closer to our
00:52objective, and the labor market had cooled from its formerly overheated state. Upside risks to
00:57inflation had diminished, but the unemployment rate had increased by almost a full percentage
01:03point, a development that historically has not occurred outside of recessions. Over the subsequent
01:10three Federal Open Market Committee meetings, we recalibrated our policy stance, setting the stage
01:16for the labor market to remain in balance near maximum employment over the past year.
01:22This year, the economy has faced new challenges. Significantly higher tariffs across our trading
01:28partners are remaking the global trading system. Tighter immigration policy has led to an abrupt
01:34slowdown in labor force growth. Over the longer run, changes in tax, spending, and regulatory policies
01:41may also have important implications for economic growth and productivity. There is significant
01:47uncertainty about where all of these policies will eventually settle, and what their lasting effects
01:53on the economy will be. Changes in trade and immigration policies are affecting both demand and supply.
02:00In this environment, distinguishing cyclical developments from trend or structural developments is difficult.
02:07This distinction is critical because monetary policy can work to stabilize cyclical fluctuations, but can
02:13do little to alter structural changes. The labor market is a case in point. The July Employment Report,
02:21released earlier this month, showed that payroll job growth slowed to an average pace of only 35,000 per
02:27month over the past three months, down from 168,000 per month during 2024. This slowdown is much larger than a
02:37year. This was assessed just a month ago, as the earlier figures for May and June were revised down
02:42substantially. But it does not appear that the slowdown in job growth has opened up a large margin of
02:47slack in the labor market, an outcome we want to avoid. The unemployment rate, while edging up in July, stands at a
02:55historically low level of 4.2 percent and has been broadly stable over the past year. Other indicators of labor market
03:02conditions are also little changed or have softened only modestly, including quits, layoffs, the ratio of vacancies to
03:10unemployment, and nominal wage growth. Labor supply has softened in line with demand, sharply lowering the break-even rate of job
03:19creation needed to hold the unemployment rate constant. Indeed, labor force growth has slowed considerably this year with the sharp fall off in
03:26immigration, and the labor force participation rate has edged down in recent months.
03:34Overall, while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers.
03:44This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.
03:56At the same time, GDP growth has slowed notably in the first half of this year to a pace of 1.2 percent, roughly half the 2.5 percent pace in 2024.
04:09The decline in growth has largely reflected a slowdown in consumer spending. As with the labor market, some of the slowing in GDP likely reflects slower growth of supply or potential output.
04:22Turning to inflation, higher tariffs have begun to push up prices in some categories of goods.
04:28Estimates based on the latest available data indicate that total PCE prices rose 2.6 percent over the 12 months ending in July.
04:37Excluding the volatile food and energy categories, core PCE prices rose 2.9 percent above their level of a year ago.
04:47Within core, prices of goods increased 1.1 percent over the past 12 months, a notable shift from the modest decline seen over the course of 2024.
04:57In contrast, housing services inflation remains on a downward trend, and non-housing services inflation is still running at a level a bit above what has been historically consistent with a 2 percent inflation.
05:11The effects of tariffs on consumer prices are now clearly visible.
05:15We expect those effects to accumulate over the coming months with high uncertainty about both timing and amounts.
05:23The question that matters for monetary policy is whether these price increases are likely to materially raise the risk of an ongoing inflation problem.
05:31A reasonable base case is that the effects will be relatively short-lived, a one-time shift in the price level.
05:38Of course, one-time does not mean all at once.
05:42It will continue to take time for tariff increases to work their way through supply chains and distribution networks.
05:50Moreover, tariff rates continue to evolve, potentially prolonging the adjustment process.
05:56It's also possible, however, that the upward pressure on prices from tariffs could spur a more lasting inflation dynamic, and that is a risk to be assessed and managed.
06:06One possibility is that workers who see their real incomes decline because of higher prices demand and get higher wages from employers, setting off adverse wage price dynamics.
06:18Given that the labor market is not particularly tight and faces increasing downside risks, that outcome does not seem likely.
06:27Another possibility is that inflation expectations could move up, dragging actual inflation with them.
06:34Inflation has been above our target for more than four years and remains a prominent concern for households and businesses.
06:41Measures of longer-term inflation expectations, however, as reflected in market and survey-based measures, appear to remain well-anchored and consistent with our longer-run inflation objective of 2%.
06:55Of course, we cannot take the stability of inflation expectations for granted.
07:00Come what may, we will not allow a one-time increase in the price level to become an ongoing inflation problem.
07:06So, putting the pieces together, what are the implications for monetary policy?
07:12In the near term, risks to inflation are tilted to the upside and risks to employment to the downside, a challenging situation.
07:21When our goals are intentioned like this, our framework calls for us to balance both sides of our dual mandate.
07:27Our policy rate is now 100 basis points closer to neutral than it was a year ago.
07:33And the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance.
07:42Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.
07:52Monetary policy is not on a preset course.
07:57FOMC members will make these decisions based solely on their assessment of the data and its implications for the economic outlook and the balance of risks.
08:06We will never deviate from that approach.
08:09So, turning then to my second topic.
08:13Our monetary policy framework is built on the unchanging foundation of our mandate from Congress to foster maximum employment and stable prices for the American people.
08:24We remain fully committed to fulfilling our statutory mandate and the revisions to our framework work will support that mission across a broad range of economic conditions.
08:34Our revised statement on longer run goals and monetary policy strategy, which we refer to as our consensus statement to save time, describes how we pursue our dual mandate goals.
08:45It is designed to give the public a clear sense of how we think about monetary policy.
08:50And that understanding is important both for transparency and accountability and for making monetary policy more effective.
08:57The changes we made in this review are a natural progression grounded in our ever evolving understanding of our economy.
09:04We continue to build upon the initial consensus statement adopted in 2012 under Chairman Ben Bernanke's leadership.
09:11Today's revised statement is the outcome of the second public review of our framework, which we conduct at five year intervals.
09:18This year's review included three elements, Fed listens events at reserve banks around the country, a flagship research conference, and policymaker discussions and deliberations supported by staff analysis at a series of FOMC meetings.
09:37In approaching this year's review, a key objective has been to make sure that our framework is suitable across a broad range of economic conditions.
09:45At the same time, the framework needs to evolve with changes in the structure of the economy and our understanding of those changes.
09:52The Great Depression presented different challenges from those of the great inflation and the great moderation, which in turn are different from the ones we face today.
10:01At the time of the last review, we were living in a new normal characterized by the proximity of interest rates to the effect of lower bound, or ELB,
10:10along with low growth, low inflation, and a very flat Phillips curve, meaning that inflation was not very responsive to slack in the economy.
10:20To me, a statistic that captures that era is that our policy rate was stuck at the ELB for seven long years following the onset of the global financial crisis in late 2008.
10:32Many here will recall the sluggish growth and painfully slow recovery of that era.
10:37It appeared highly likely that if the economy experienced even a mild downturn, our policy rate would be back at the ELB very quickly, probably for another extended period.
10:48Inflation and inflation expectations could then decline in a weak economy, raising real interest rates as nominal rates were pinned near zero.
10:56Higher real rates would further weigh on job growth and reinforce the downward pressure on inflation and inflation expectations, triggering an adverse dynamic.
11:09The economic conditions that brought the policy rate to the ELB and drove the 2020 framework changes were thought to be rooted in slow moving global factors that would persist for an extended period.
11:20And they might well have done so, if not for the pandemic.
11:24The 2020 consensus statement included several features that addressed the ELB related risks that had become increasingly prominent over the preceding two decades.
11:33We emphasized the importance of anchored inflation, longer term inflation expectations to support both our price stability and maximum employment goals.
11:42Drawing on an extensive literature on strategies to mitigate risks associated with the ELB, we adopted flexible average inflation targeting, a makeup strategy to ensure that inflation expectations would remain well anchored, even with the ELB constraint.
11:58In particular, we said that following periods when inflation had been running persistently above 2%, appropriate monetary policy would likely aim to achieve inflation moderately above 2% for some time.
12:10In the event, rather than low inflation in the ELB, the post-pandemic reopening brought the highest inflation in 40 years to economies around the world.
12:19Like most other central banks and private sector analysts through year-end 2021, we thought that inflation would subside fairly quickly without a sharp tightening in our policy stance, as this slide will show.
12:32When it became clear this was not the case, we responded forcefully, raising our policy rate by 5.25% over 16 months.
12:42That action, combined with the unwinding of pandemic supply disruptions, contributed to inflation moving much closer to our target without the painful rise in unemployment that has accompanied previous efforts to counter high inflation.
12:57This year's review considered how economic conditions have evolved over the past five years.
13:02During this period, we saw that the inflation situation can change rapidly in the face of large shocks.
13:08In addition, interest rates are now substantially higher than was the case during the era between the global financial crisis and the pandemic.
13:16With inflation above target, our policy rate is restrictive, modestly so in my view.
13:22We cannot say for certain where rates will settle out over the longer run, but their neutral rate may now be higher than during the 2010s, reflecting changes in productivity, demographics, fiscal policy, and other factors that affect the balance between saving and investment.
13:38During the review, we discussed how the 2020 statement's focus on the ELB may have complicated communications about our response to high inflation.
13:46We concluded that the emphasis on an overly specific set of economic conditions may have led to some confusion, and as a result, we made several important changes to the consensus statement to reflect that insight.
13:59First, we removed language indicating that the ELB was a defining feature of the economic landscape.
14:06Instead, we noted that our monetary policy strategy is designed to promote maximum employment and stable prices across a broad range of economic conditions.
14:15The difficulty of operating near the ELB remains a potential concern, but it is not our primary focus.
14:22The revised statement reiterates that the Committee is prepared to use its full range of tools to achieve its maximum employment and price stability goals, particularly if the federal funds rate is constrained by the ELB.
14:36Second, we returned to a framework of flexible inflation targeting and eliminated the make-up strategy.
14:43As it turned out, the idea of an intentional moderate inflation overshoot had proved irrelevant.
14:49There was nothing intentional or moderate about the inflation that arrived a few months after we announced our 2020 changes to the consensus statement, as I acknowledged publicly in 2021.
15:01Well-anchored inflation expectations were critical to our success in bringing down inflation without a sharp increase in unemployment.
15:11Anchored expectations promote the return of inflation to target when adverse shocks drive inflation higher and limit the risk of deflation when the economy weakens.
15:20Further, they allow monetary policy to support maximum employment in economic downturns without compromising price stability.
15:29Our revised statement emphasizes our commitment to act forcefully to ensure that longer-term inflation expectations remain well-anchored to the benefit of both sides of our dual mandate.
15:40It also notes that price stability is essential for a sound and stable economy and supports the well-being of all Americans.
15:49This theme came through loud and clear at our Fed Listens events.
15:52The past five years have been a painful reminder of the hardship that high inflation imposes, especially on those least able to meet the higher costs of necessities.
16:03Third, our 2020 statement said that we would mitigate shortfalls rather than deviations from maximum employment.
16:10The use of shortfalls reflected the insight that our real-time assessments of the natural rate of unemployment, and hence of maximum employment, are highly uncertain.
16:20The later years of the post-global financial crisis recovery featured employment running for an extended period above mainstream estimates of its sustainable level, along with inflation running persistently below our 2% target.
16:34In the absence of inflationary pressures, it might not be necessary to tighten policy based solely on uncertain real-time estimates of the natural rate of unemployment.
16:45We still have that view, but our use of the term shortfalls was not always interpreted as intended, raising communications challenges.
16:52In particular, the use of shortfalls was not intended as a commitment to permanently forswear preemption or to ignore labor market tightness.
17:02Accordingly, we removed shortfalls from our statement.
17:05Instead, the revised document now states more precisely that the committee recognizes that employment may run, at times, above real-time assessments of maximum employment without necessarily creating risks to price stability.
17:21Of course, preemptive action would likely be warranted if tightness in the labor market or other factors pose risks to price stability.
17:30The revised statement also notes that maximum employment is the highest level of employment that can be achieved on a sustained basis in a context of price stability.
17:39This focus on promoting a strong labor market underscores the principle that durably achieving maximum employment fosters broad-based economic opportunities and benefits for all Americans.
17:51The feedback we received at Fed Listens events reinforced the value of a strong labor market for American households, employers, and communities.
18:02Fourth, consistent with the removal of shortfalls, we made changes to clarify our approach in periods where our employment and inflation objectives are not complementary.
18:12In those circumstances, we will follow a balanced approach in promoting them.
18:17The revised statement now more closely aligns with the original 2012 language.
18:22We take into account the extent of departures from our goals and the potentially different time horizons over which each is projected to return to a level consistent with our dual mandate.
18:33These principles guide our policy decisions today, as they did in the 2022-24 period, when the departure from our 2% inflation target was the overriding concern.
18:45In addition to these changes, there is a great deal of continuity with past statements.
18:50The document continues to explain how we interpret the mandate Congress has given us and describes the policy framework that we believe will best promote maximum employment and price stability.
19:00We continue to believe that monetary policy must be forward-looking and consider the lags in its effects on the economy.
19:07For this reason, our policy actions depend on the economic outlook and the balance of risks to that outlook.
19:13We continue to believe that setting a numerical goal for employment is unwise because the maximum level of employment is not directly measurable and changes over time for reasons unrelated to monetary policy.
19:25We also continue to view a longer-run inflation rate of 2% as most consistent with our dual mandate goals.
19:34We believe that our commitment to this target is a key factor, helping keep longer-term inflation expectations well anchored.
19:40Experience has shown that 2% inflation is low enough to ensure that inflation is not a concern in household and business decision-making,
19:48while also providing a central bank with some policy flexibility to provide accommodation during economic downturns.
19:55Finally, the revised consensus statement retained our commitment to conduct a public review roughly every five years.
20:03There's nothing magic about the five-year pace.
20:05That frequency allows policymakers to reassess structural features of the economy and to engage with the public, practitioners, and academics on the performance of our framework.
20:15It is also consistent with several global peers.
20:20To wrap up, I want to thank President Schmidt and all of his great Kansas City staff who work so diligently to host this outstanding event annually,
20:30counting a couple of virtual appearances during the pandemic.
20:33This is the eighth time I've had the honor to speak from this podium.
20:36Each year, this symposium offers the opportunity for Fed leaders to hear ideas from leading economic thinkers and focus on the challenges we face.
20:45The Kansas City Fed was very wise to lure Chair Volcker here to this national park more than 40 years ago,
20:52and I am so proud to be part of that tradition.
20:55Thank you very much.
20:56Thank you very much.
20:57Thank you very much.
21:01Thank you very much.
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