On August 23rd, Caixin News reported that on Friday local time, Federal Reserve Chairman Powell delivered a speech at the annual Jackson Hole Conference. As a highly anticipated moment in the global market, the Fed Chairman publicly announced that the Fed is about to officially enter an interest rate cut cycle.

The following is the full text of the speech:

Today, 4.5 years after the outbreak of the COVID-19 pandemic, the economic distortions related to the pandemic are gradually fading from their most severe state. Inflation has significantly decreased, the labor market is no longer overheated, and the current market conditions are looser than before the pandemic. Supply constraints have returned to normal, and the risk balance we face in our dual mandate has changed. Our goal is to restore price stability while maintaining a strong labor market and avoiding a significant increase in unemployment rates as seen in the past when inflation expectations were unstable. We have made considerable progress in achieving this goal. Although the task is not yet complete, we have indeed made significant progress.

Today, I will first discuss the current economic situation and the forward path of monetary policy. Then, I will discuss the economic events since the start of the pandemic, exploring why inflation has risen to levels unseen in generations and why inflation has decreased so much despite low unemployment rates.

Short-term Outlook for Policy

Let's begin with the current situation and the short-term outlook for policy.

For much of the past three years, inflation has been well above our 2% target, and labor market conditions have been extremely tight. The Federal Open Market Committee (FOMC) has rightfully been focused on bringing down inflation. Before this episode, most Americans alive today had never experienced the painful consequences of sustained high inflation. Inflation has caused significant hardships, especially for those who struggle with rising costs of necessities such as food, housing, and transportation. High inflation has created pressures and an enduring sense of unfairness.

Our tight monetary policy has helped restore the balance between total supply and demand, alleviate inflationary pressures, and ensure stable inflation expectations. Now, inflation is closer to our policy target, with prices rising 2.5% in the past 12 months. Progress towards our 2% target has resumed after a temporary slowdown earlier this year. I am increasingly confident that inflation is on a sustainable path to reach 2%.

Speaking of employment, in the years before the pandemic, we saw significant benefits to society from a strong labor market: low unemployment rates, high labor force participation rates, historically low racial employment gaps, and healthy real wage growth in a low and stable inflation environment, with these gains increasingly concentrated among low-income individuals.

Today, the labor market has noticeably cooled down and is no longer as overheated as before. The unemployment rate started rising over a year ago and is now at 4.3%, still historically low but about one percentage point higher than the beginning of 2023. Most of the increase has occurred in the past six months.

So far, the rise in the unemployment rate is not due to large-scale layoffs typically seen during an economic downturn, but primarily reflects a significant increase in labor supply and a slowdown in the pace of hiring. Nevertheless, the labor market cooling is still evident. Job growth remains solid but has slowed down this year. Job vacancies have decreased, and the ratio of job openings to unemployment has returned to pre-pandemic levels. Hiring and quit rates are now lower than in 2018 and 2019. Nominal wage growth has slowed down. Overall, the labor market is now much looser than in 2019 before the outbreak of the pandemic when inflation was below 2%. The labor market appears unlikely to be a source of inflationary pressures in the short term. We are not seeking or welcoming further cooling of labor market conditions.

Overall, the economy is still growing at a steady pace. However, inflation and labor market data indicate that the situation is evolving. Upside risks to inflation have diminished, while downside risks to employment have increased. As we emphasized in the previous FOMC statement, we are focused on the risks to our dual-mandate objectives.

Now is the time to adjust our policy. The direction forward is clear, and the timing and pace of interest rate cuts will depend on future data, evolving outlook, and the balance of risks.

We will make every effort to support a strong labor market while continuing to move towards our price stability objective. With the appropriate reduction in policy constraints, there is ample reason to believe that the economy will restore a 2% inflation rate while maintaining a strong labor market. Our current policy rate level provides sufficient room to address any risks, including the risk of further deterioration in labor market conditions.

Fluctuations in inflation

Now let's turn to discussing why inflation is rising, as well as why inflation is significantly decreasing while the unemployment rate remains low. Research on these issues is growing continuously, and now is a good time to discuss these issues. Of course, it is still too early to make a definitive assessment. This period will continue to be analyzed and discussed for many years to come.

The arrival of the COVID-19 pandemic quickly led to a global economic shutdown. This is a period filled with uncertainty and severe downside risks. During the crisis, Americans have adapted and innovated as always. Unprecedented strong responses have been made by the government, especially in the USA, where Congress unanimously passed the CARES Act. At the Federal Reserve, we have used our powers more forcefully than ever to stabilize the financial system and help prevent an economic downturn.

After experiencing a historically deep but short recession, the economy began to recover in mid-2020. As the risks of a severe, prolonged recession diminished, the economy reopened, facing the risk of a slow recovery similar to after the global financial crisis.

Congress provided significant additional fiscal support at the end of 2020 and the beginning of 2021. Consumer spending rebounded strongly in the first half of 2021. The continued pandemic shaped the recovery pattern of the consumer market. Persistent concerns about the pandemic affected face-to-face service consumption. Suppressed demand, stimulus policies, changes in work and leisure patterns due to the pandemic, and additional savings due to limited service consumption collectively drove the historical surge in consumer goods spending.

The pandemic also severely disrupted the supply situation. At the start of the pandemic outbreak, 8 million people left the labor market, and by early 2021, the labor force was still 4 million smaller than before the pandemic. It was not until mid-2023 that the labor force size recovered to pre-pandemic trends.

The supply chain was in chaos due to labor loss, interruptions in international trade links, and drastic changes in demand structures and levels. Clearly, this is completely different from the slow recovery after the global financial crisis.

Inflation followed suit. After inflation rates were below target in 2020, inflation soared in March and April 2021. The initial surge in inflation was focused on goods in short supply, such as motor vehicles, with prices rising significantly. My colleagues and I initially judged that these pandemic-related factors would not persist, so we believed that the sudden increase in inflation might pass quickly without the need for monetary policy intervention – in short, inflation was temporary. The long-standing standard view is that as long as inflation expectations remain stable, central banks can ignore temporary inflation increases.

"Transitory inflation" was widely accepted at the time, with most mainstream analysts and central bank governors of developed economies holding this view. The general expectation was that supply conditions would improve relatively quickly, the rapid recovery in demand would come to an end, demand would shift from goods to services, thereby reducing inflation.

For a period of time, the data and the assumption of temporary inflation were consistent. From April to September 2021, the monthly readings of core inflation were decreasing, although the progress was slower than expected.

By mid-year, the support for this assumption began to weaken, which was also reflected in our communication. Starting from October, the data no longer supported the assumption of temporary inflation. Inflation began to rise, expanding from commodities to services. It is evident that high inflation is not a temporary phenomenon, and a strong policy response is needed to maintain stable inflation expectations. We realized this and started adjusting our policy in November. Financial conditions began to tighten. After gradually ending asset purchases, we initiated rate hikes in March 2022.

By early 2022, the overall inflation rate had exceeded 6%, with core inflation exceeding 5%. New supply shocks emerged. The outbreak of the Russia-Ukraine conflict led to a sharp increase in energy and commodity prices. The improvement in supply conditions and the longer-than-expected shift in demand from goods to services, partly due to further developments in the US pandemic. The pandemic also continued to disrupt the production of major economies worldwide.

High inflation rates are a global phenomenon that reflect a common experience: rapid increase in commodity demand, supply chain tightness, labor market tightness, and sharp rise in commodity prices. Inflation on a global scale is different from any period since the 1970s. At that time, high inflation was deeply rooted — we are firmly committed to avoiding this situation.

By mid-2022, the labor market was extremely tight, with labor demand increasing by over 6.5 million since mid-2021. This increase in labor demand can be partly met by workers returning to the workforce after the retreat of the pandemic. However, labor supply remains constrained, and by the summer of 2022, labor force participation is still far below pre-pandemic levels. From March to the end of the year, job vacancies were nearly twice the number of unemployed, indicating a severe labor shortage. Inflation peaked in June 2022 at 7.1%.

Two years ago, on this platform, I discussed some of the pain that may come with combating inflation, such as rising unemployment rates and slowing economic growth. Some believe that controlling inflation requires a recession and long-term high unemployment rates. I expressed our unwavering commitment to full recovery of price stability and pledged to persist until the mission is accomplished.

The FOMC did not retreat and fulfilled our duties firmly. Our actions have strongly demonstrated our commitment to restoring price stability. We raised policy rates by 425 basis points in 2022 and another 100 basis points in 2023. Since July 2023, we have maintained policy rates at the current level of tightening.

The summer of 2022 marked the peak of inflation. Within two years, the inflation rate has declined by 4.5 percentage points from its peak, while the unemployment rate remained low, which is a popular and historically uncommon outcome.

Why did inflation decrease while the unemployment rate did not rise significantly?

The distortion of supply and demand related to the epidemic, as well as the severe impact on the energy and commodity markets, are important driving factors for high inflation, and their reversal is also a key part of the decline in inflation. The subsiding (time) of these factors played an important role in the subsequent decline in inflation. Our tight monetary policy has led to a moderate decline in total demand, combined with improvement in overall supply, reducing inflationary pressures and allowing the economy to continue growing at a healthy pace. With the slowdown in labor demand, the level of job vacancies relative to unemployment has normalized, mainly through a reduction in job vacancies, while there has not been large-scale and disruptive layoffs, which no longer make the labor market a source of inflationary pressures.

It is also important to mention the critical importance of inflation expectations. The long-held view of the standard economic model has been that as long as the product and labor markets are balanced, inflation will return to the target level - without the need for an economic slowdown - as long as inflation expectations remain stable at our target level. This is what the model says, but since the 2000s, the stability of long-term inflation expectations has never been tested by sustained high inflation. Whether the anchor of inflation will remain stable is far from certain. Concerns about the decoupling of inflation expectations have intensified the view that a decline in inflation requires an economic slowdown, especially in the labor market. The important lesson from recent experience is that stable inflation expectations, combined with strong action by the central bank, can achieve a decline in inflation without the need for an economic slowdown.

This narrative attributes the main reasons for the rise in inflation to overheating and temporary distortions in demand colliding with constrained supply. While researchers differ in methodology and conclusions, there seems to be a consensus forming, which I believe attributes the main cause of the rise in inflation to this collision. Overall, as the market recovers from distortions caused by the epidemic, our efforts to moderately curb total demand, along with anchoring expectations, are working together to make inflation increasingly evident and on a sustainable path to reach our 2% target.

Achieving a decline in inflation while maintaining a strong labor market is only possible when inflation expectations are anchored, reflecting the public's confidence in the central bank's ability to achieve 2% inflation over time. This confidence has been built up over decades and has been strengthened through our actions.

This is my assessment of the situation. You may have a different opinion.

Conclusion

Finally, I want to emphasize that the pandemic economy has proven to be different from any previous period, and there is much to learn from this extraordinary time. The Federal Reserve has committed in the 'Statement on Longer-Run Goals and Monetary Policy Strategy' to conduct a comprehensive public review of our principles and make appropriate adjustments every five years. As we begin this process later this year, we will remain open to criticism and new ideas while maintaining the strengths of our framework. The limitations of our knowledge - evident during the pandemic - require us to remain humble and inquisitive, focusing on drawing lessons from past experiences and flexibly applying them to current challenges.

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Editor/Somer