Powell’s speech at the Jackson Hole conference (full text)

It has been 17 months since the US economy was hit by the full impact of the new crown pneumonia epidemic. The impact of the epidemic caused an unprecedented economic recession, and the economy was shut down in an effort to control the spread of the epidemic.

The road to economic recovery is very difficult. First of all, we must thank those who are fighting the epidemic on the front line: those important workers who maintain the operation of the economy, those who take care of other people in need, and those colleagues in medical research, business and government. Together, they discovered, produced and distributed effective vaccines widely in record time. We should also remember those who lost their lives due to COVID-19 and their relatives.

Strong policy support has promoted a strong but unbalanced economic recovery-all aspects of the economy have shown quite unusual characteristics in history. Contrary to the typical pattern in the economic downturn, total personal income does not fall but rises, and household expenditure shifts from services to manufactured goods. The booming commodity demand and the intensity and speed of the economic restart have caused shortages and bottlenecks, preventing those suppliers who are restricted by the epidemic from keeping up (demand). The result is an increase in durable goods inflation-and in the past 25 years, the sector’s annual inflation rate has been well below zero. The labor market is improving, but it is quite turbulent. The epidemic not only continues to threaten our health and lives, but also threatens economic activities. Many other advanced economies are experiencing similar anomalies.

Figure 1: Spending on durable goods has soared, while spending on services remains weak

Powell's speech at the Jackson Hole conference (full text)

In my comments today, I will focus on the Fed’s efforts to promote our full employment goals and price stability goals during this pandemic, and briefly describe the lessons we have learned from history, our new data, and How cautious concerns about changing risks will provide useful guidance for today’s unique monetary policy challenges.

Economic recession and recovery so far

The economic recession triggered by the epidemic – the shortest but deepest recession ever recorded – has resulted in approximately 30 million workers losing their jobs in two months. The decline in output in the second quarter of 2020 was twice as much as the total decline during the Great Recession from 2007 to 2009. But then the speed of the economic recovery exceeded expectations, and output exceeded its previous peak only four quarters later, less than half of the time required after the last Great Recession. As is usually the case, the recovery in employment lags behind the recovery in output; however, employment growth has also been faster than expected.

Figure 2: The labor market is recovering…but the recovery is not yet complete

Powell's speech at the Jackson Hole conference (full text)

Economic recession has not been imposed on all Americans equally, and those who are least able to bear the burden of recession have been the hardest hit. It needs to be pointed out that despite the progress made in employment, unemployment still falls disproportionately on low-wage workers in the service sector, as well as African Americans and Hispanics.

The imbalance in the recovery can also be shifted through the expenditure sector to commodities—especially durable goods such as electrical appliances, furniture, and automobiles—rather than the service industry, especially from the perspective of services in areas such as tourism and leisure (Figure 1). Affected by the epidemic, dining in restaurants has dropped by 45%, air travel has dropped by 95%, and dentist visits have dropped by 65%. Today, although GDP and consumer spending have fully recovered, serviceable spending is still about 7% below the trend level. The total number of employed people is now 6 million below the level in February 2020, and 5 million of them are due to the downturn in the service sector. In contrast, spending on durable goods has boomed since the start of the recovery, and is now about 20% higher than before the epidemic. As demand exceeds the supply side affected by the epidemic, rising prices of consumer durables are the main factor that has caused the inflation rate to far exceed our 2% target.

In view of the continued economic turmoil, some tensions and surprises are inevitable. The work of monetary policy aims to promote full employment and price stability when the economy passes through this challenging period. I will now discuss the progress made in achieving these goals.

The way forward: full employment

In recent months, the outlook for the labor market has greatly improved. After experiencing the turmoil of last winter, employment growth this year has steadily increased, and is currently an average of 832,000 in the past three months, of which nearly 800,000 are employed in the service industry (Figure 2). The rate of total recruitment is faster than at any time before the epidemic. The level of job vacancies and resignations is at historically high levels, and employers report that they cannot fill positions quickly to meet the resurgence in demand.

These favorable conditions for job seekers should help the economy fill the remaining space for full employment. The unemployment rate has fallen to 5.4%, the lowest point since the epidemic, but it is still too high, and the reported unemployment rate underestimates the degree of slack in the labor market. The long-term unemployment rate remains high, and the recovery of the labor force participation rate lags far behind other parts of the labor market, as has been the case in past recoveries.

With the increase in vaccination rates, the reopening of schools and the expiration of unemployment subsidies, some factors that may hinder job seekers may be fading. Although the Delta epidemic has rekindled recent risks, the prospects for the economy to continue to move towards full employment levels are good.

The Way Forward: Inflation

The rapid restart of the economy led to a sharp rise in inflation. In the 12 months ending in July this year, the PCE and core PCE inflation rates were 4.2% and 3.6%, respectively, far higher than our long-term inflation target of 2%. Enterprises and consumers generally report that prices and wages are under upward pressure. Of course, the current level of inflation is a hidden concern. But concerns about high inflation will be tempered by other factors, which suggest that persistently high (inflation) data may prove to be temporary. Making such an assessment is very critical and requires (us) continuous tracking, and we are carefully monitoring the new data.

Figure 3: Broader inflation indicators remain stable

Powell's speech at the Jackson Hole conference (full text)

The dynamics of inflation are complex. We evaluate the outlook for inflation from a number of different perspectives. I will discuss this issue below.

1. So far, the lack of widespread inflationary pressure

The surge in inflation is mainly related to a few relatively narrow categories of goods and services that are directly affected by the epidemic and economic reopening. Durable goods alone contributed approximately 1% to the headline/core inflation rate in the last 12 months. Energy prices rebounded along with the strong recovery, adding another 0.8% to the overall inflation rate. Based on long-term experience, we expect the inflationary impact of these increases to be temporary. In addition, some prices—for example, the prices of hotel rooms and airline tickets, which dropped sharply during the economic downturn, have now returned to levels close to their pre-epidemic levels. The 12-month window we used to calculate inflation now happens to capture the price rebound, but not the initial drop, temporarily raising the reported inflation level. These effects have increased the measured inflation rate by several percent, and their effects should disappear over time.

We refer to a series of indicators to understand whether the price increase of a specific item will spillover into widespread inflation. Including censored average and excluding durable consumer goods indicators, as well as calculations from before the outbreak. The calculated results usually show that inflation is at or near our long-term goal of 2%. We are concerned about signs of inflationary pressures spreading more widely in the economy.

Figure 4: Long-term inflation expectations have rebounded rapidly

Powell's speech at the Jackson Hole conference (full text)

2. High inflation projects have eased

We are also directly monitoring the prices of specific goods and services most affected by the epidemic and economic restart. We have seen that in some cases, as the supply shortage eases, prices have eased. For example, the price of used cars seems to have stabilized; in fact, some price indicators are also beginning to decline. If this situation can be maintained, as many analysts have predicted, then used car prices will soon drive down inflation, as they have shown for most of the past decade.

The same dissipation of rising inflationary pressures, and in some cases reversals, seems likely to be more common in consumer durables. In the 25 years before the epidemic, the prices of consumer durables actually fell, with an average annual inflation rate of minus 1.9%. As the supply problem begins to be resolved, the inflation of consumer durables other than automobiles has now slowed and may begin to decline. It seems unlikely that durable goods inflation will continue to make a significant contribution to overall inflation for some time. We will look for evidence to support or weaken this expectation.

Figure 5: Durable goods inflation has been lower than service industry inflation in the 25 years before the epidemic

Powell's speech at the Jackson Hole conference (full text)

3. Salary

We also assessed whether wage growth is consistent with the long-term 2% inflation rate. Wage growth is essential to support the ever-increasing standard of living, and everyone is happy to see wage growth. However, if wage growth continues to exceed the level of productivity growth and inflation, companies may pass on these increases to customers, and this process may become the kind of “wage price spiral” that we often see in history.

Today, we see little evidence of wage growth that could lead to excessive inflation. Broad-based wage measures, such as the Employment Cost Index (ECI) and Atlanta Wage Growth Tracking Index, adjusted to changes in the composition of the labor force, show that wages are rising at a rate that seems to be consistent with our long-term inflation target. We will continue to carefully monitor the progress of wages.

Figure 6: Stable wage growth

Powell's speech at the Jackson Hole conference (full text)

4. Long-term inflation expectations

Policymakers and analysts generally believe that as long as long-term inflation expectations remain stable, policies can and should be used to detect temporary disturbances in inflation. Our monetary policy framework emphasizes that anchoring long-term inflation expectations at 2% is important for full employment and price stability.

We carefully monitored a wide range of long-term inflation expectations indicators. These indicators are today at a level roughly consistent with our 2% target (Figure 4). Since the measurement of inflation expectations alone can be noisy, we also pay attention to the consistent performance of various indicators. One way to summarize these performance patterns is the General Inflation Expectation Index (CIE) of the Council Staff, which combines information from a wide range of surveys and market indicators. This index reflects that from around 2014, when the inflation rate continued to fall below 2%, inflation expectations generally fell. Recently, the indicator shows that this downward trend has undergone a welcome reversal, and the current level is more in line with our 2% target.

The change in long-term inflation expectations is much smaller than actual inflation or short-term expectations, which shows that households, businesses, and market participants also believe that current high inflation may prove to be temporary. Moreover, in any case, the Fed will treat inflation. The rate remains close to the policy target of 2%.

5. The forces of global deinflation over the past 25 years

Finally, it is worth noting that since the 1990s, inflation rates in many advanced economies have been slightly below 2% even when the economy is improving. This low-inflation model may reflect the continued forces to eliminate inflation, including technological progress, globalization, and perhaps demographic factors, as well as the central bank’s stronger and more successful commitment to maintaining price stability. In the United States, the unemployment rate has been below 4% for about two years before the epidemic, while the inflation rate has remained at 2% or below. Wages have indeed risen across the income range-this is a good sign, but it is not enough to continue to increase the inflation rate to 2%. Although the underlying global de-inflation factors may change over time, there is no reason to believe that they have suddenly reversed or weakened. It seems more likely that as this epidemic becomes history, they will continue to have an impact on inflation.

Figure 7: Since the 1990s, inflation in advanced economies has long been below 2%

Powell's speech at the Jackson Hole conference (full text)

We will continue to test the above assessment by monitoring new inflation data.

All in all, the Fed’s baseline outlook is to continue to move towards full employment, and the inflation rate will return to a level consistent with our target, that is, the inflation rate will average 2% over a period of time. Let me now talk about how the baseline outlook and the associated risks and uncertainties affect our monetary policy formulation.

Impact on monetary policy

The historical period from 1950 to the early 1980s provided two important lessons for managing the risks and uncertainties we face today. The stabilization policy of the early 1950s told monetary policy makers not to try to offset what might be temporary inflationary fluctuations. In fact, making a policy response may do more harm than good, especially in an era when policy interest rates are closer to the lower effective bound even when the economy is good. The main impact of monetary policy on inflation may appear after a lag of one year or more. If a central bank tightens policies in response to factors that have proven to be temporary, the main policy impact is likely to come when the policy is no longer necessary. Untimely policy moves have unnecessarily slowed hiring and other economic activities, and pushed inflation below expectations. Today, as there is still a lot of slack in the labor market and the epidemic continues, such policy errors can be particularly harmful. We know that prolonged unemployment may mean lasting damage to the productivity of workers and the economy.

However, history has also told us that the central bank cannot assume that inflation caused by temporary factors will fade. During the two periods of the 1970s, energy and food prices rose sharply, raising the overall inflation rate for a period of time. However, when the direct impact of the two on overall inflation faded, core inflation continued to be higher than before. One possible factor is that the public has begun to generally expect higher inflation-which is why we are now monitoring inflation expectations so carefully.

Central banks have always faced the problem of distinguishing temporary inflation peaks from more troublesome developments, and it is sometimes difficult to do so with confidence in real time. At this time, there is no substitute for careful attention to new data and changing risks. If persistently high inflation becomes a serious problem, the Federal Open Market Committee (FOMC) will definitely respond and use our tools to ensure that inflation is running at a level that meets our goals.

The new data should provide more evidence that some supply and demand imbalances are improving, and provide additional evidence that inflation is continuing to ease, especially the prices of goods and services that are most affected by the epidemic. We also expect to see continued strong job creation. And we will learn more about the impact of the Delta variant. For now, I believe that monetary policy has been beneficial; as usual, we are ready to adjust our policies as appropriate to achieve our goals.

Here I want to make a summary of the future path of monetary policy. The FOMC remains unswervingly fulfilling our frequently expressed commitment to support the economy within the time required to achieve a full recovery. The changes we made to our long-term goals and monetary policy statement last year are very suitable for meeting today’s challenges.

We have said that we will continue to purchase assets at the current rate until we see substantial further progress in achieving our full employment and price stability goals. The so-called progress here is since we first stated this in December last year. The guidance was delineated and measured. My view is that the test of “substantial further progress” has passed in terms of inflation. Significant progress has also been made in achieving full employment. At the most recent FOMC meeting in July, I agreed with most attendees that if the economy develops roughly as expected, it may be appropriate to start reducing the pace of asset purchases this year. The month since the last memory has brought more progress, namely the strong employment report in July, but at the same time the Delta epidemic is also spreading further. We will carefully evaluate new data and changing risks. Even after the end of our asset purchases, the longer-term securities we hold will continue to support easy financial conditions.

In the future, reducing the time and speed of asset purchases will have nothing to do with signalling the timing of interest rate hikes. For this issue, we have clarified a different and more rigorous “test”. We have already said that we will continue to maintain the target range of the federal funds rate at the current level until the economy reaches conditions consistent with full employment, and the inflation rate has reached 2%, and is expected to exceed it moderately for a period of time. 2%. To achieve full employment, we still have a lot to do, and time will tell whether we have reached a 2% inflation rate on a sustainable basis.

For the public we serve, this is a challenging time because the epidemic and its unprecedented damage to health and economic activities linger. However, I will conclude this speech with a positive attitude. Before the epidemic, we all saw the extraordinary benefits that a strong labor market can bring to our society. Despite the current challenges we face, the economy is on the road to such a strong labor market, with high levels of employment and participation, extensive wage growth, and inflation close to our price stability goal.

thank you very much.


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