Full text of Federal Reserve Chairman Powell's speech: The time for policy adjustment has come, and the labor market does not need to cool down further

Author: Jerome H. Powell, Chair of the Federal Reserve

Compiled by: Lyric, ChainCatcher

Editor’s Note: In this speech, Federal Reserve Chair Powell issued the strongest signal yet for interest rate cuts, clearly stating that action will be taken to prevent further weakening of the U.S. labor market. Powell emphasized, "We do not seek nor welcome further cooling of labor market conditions," and stated that now is the time to adjust policy. This statement almost marks the end of the Federal Reserve's anti-inflation efforts.

Below is the full text of Federal Reserve Chair Powell's speech, compiled by ChainCatcher:

Four and a half years after the outbreak of the COVID-19 pandemic, the most severe economic distortions caused by the pandemic are fading. Inflation has decreased significantly. The labor market is no longer overheated, and current conditions are looser than before the pandemic. Supply constraints have normalized. The balance of risks facing our two main objectives has also shifted. Our goal is to restore price stability while maintaining a strong labor market, avoiding a sharp rise in unemployment during a period of early deflation when inflation expectations are less stable. We have made significant progress toward this goal. Although the task is not yet complete, we have made substantial strides.

Today, I will first discuss the current economic situation and the future direction of monetary policy. Then, I will discuss the economic events since the outbreak of the pandemic, exploring why inflation rose to levels not seen in a generation and why inflation has decreased significantly while unemployment remains low.

Recent Policy Outlook

Let’s first understand the current situation and recent policy outlook.

For most of the past three years, inflation has been well above our 2% target, and labor market conditions have been extremely tight. The primary focus of the Federal Open Market Committee (FOMC) has been to reduce inflation, which is understandable. Until recently, most Americans had not experienced the pain of prolonged high inflation. Inflation has caused significant hardship, especially for those least able to bear the high costs of essentials like food, housing, and transportation. The pressures and sense of unfairness stemming from high inflation persist to this day.

Our tightening monetary policy has helped restore the balance between total supply and total demand, alleviating inflationary pressures and ensuring that inflation expectations remain stable. Inflation is now closer to our target, with prices rising 2.5% over the past 12 months.

After pausing earlier this year, we have resumed our efforts toward the 2% target. I am increasingly confident that inflation will return to 2% in a sustainable manner.

When it comes to employment, we saw significant benefits to society from the long-term strong labor market conditions in the years leading up to the pandemic: low unemployment rates, high participation rates, historically low racial employment gaps, and low and stable inflation rates, with healthy real wage growth increasingly concentrated among low-income individuals.

Today, the labor market has cooled significantly from its previous overheated state. The unemployment rate began to rise over a year ago and currently stands at 4.3%—still low by historical standards, but nearly a full percentage point higher than at the beginning of 2023.

Most of the growth has occurred in the past six months. So far, the rise in the unemployment rate has not resulted from an increase in layoffs, which is common during economic downturns. Instead, the rise in the unemployment rate primarily reflects a significant increase in the supply of workers and a slowdown in the previously frantic pace of hiring. Even so, the cooling of labor market conditions is evident. Job growth remains robust but has slowed this year.

The number of job vacancies has decreased, and the ratio of job vacancies to the unemployment rate has returned to pre-pandemic levels. The hiring and quitting rates are currently below the levels of 2018 and 2019. Nominal wage growth has slowed. Overall, labor market conditions are now better than they were in 2019, when inflation was below 2%. It seems unlikely that the labor market will become a source of rising inflationary pressures in the short term. We neither seek nor welcome further cooling of labor market conditions.

Overall, the economy continues to grow steadily. However, inflation and labor market data indicate that conditions are changing. The upside risks to inflation have diminished. The downside risks to employment have increased. As we emphasized in our last FOMC statement, we are attentive to the risks facing our dual mandate.

The time for policy adjustment has come. The direction of policy is clear, and the timing and pace of interest rate cuts will depend on subsequent data, changes in the outlook, and the balance of risks.

We will do everything we can to support a strong labor market while further achieving price stability. By appropriately reducing policy constraints, we have ample reason to believe that the economy will return to a 2% inflation rate while maintaining a strong labor market. Our current policy rate level provides us with sufficient space to address any risks we may face, including the risk of further deterioration in labor market conditions.

The Ups and Downs of Inflation

Now let’s discuss why inflation has risen and why it has decreased significantly while unemployment remains low. There is an increasing body of research on these issues, and now is a good time for discussion. Of course, it is still too early to make definitive assessments. People will continue to analyze and debate this period long after we have left it.

The outbreak of COVID-19 quickly led to a global economic shutdown. This was a time filled with uncertainty and severe downside risks. As often happens during crises, Americans adapted and innovated. Governments responded with extraordinary force, particularly the U.S. Congress, which passed the CARES Act with unanimous support. At the Federal Reserve, we used our powers to stabilize the financial system and help avoid an economic depression to an unprecedented degree.

After experiencing the most severe but brief recession in history, the economy began to grow again in mid-2020. As the risks of a severe, prolonged recession faded and the economy reopened, we faced the risk of a painfully slow recovery reminiscent of the post-global financial crisis period.

Congress provided substantial additional fiscal support at the end of 2020 and the beginning of 2021. In the first half of 2021, spending rebounded strongly. The ongoing pandemic affected the pattern of recovery. Continued concerns about COVID-19 weighed on spending for in-person services. However, pent-up demand, stimulus policies, changes in work and leisure habits due to the pandemic, and additional savings associated with limited spending on services all contributed to a historic surge in consumer spending on goods.

The pandemic also severely disrupted supply conditions. At the onset of the pandemic, 8 million people exited the labor force, and the labor force remained 4 million below pre-pandemic levels in early 2021. The labor force did not return to pre-pandemic levels until mid-2023.

Supply chains were strained by worker shortages, disruptions in international trade, and significant changes in the structure and level of demand.

Clearly, this is very different from the slow recovery following the global financial crisis.

Inflation began to emerge. After being below target for all of 2020, inflation surged in March and April 2021. The initial inflation surge was concentrated rather than widespread, with significant price increases for scarce goods like automobiles. My colleagues and I initially judged that these pandemic-related factors would not persist, and therefore, the sudden rise in inflation would likely pass quickly without the need for monetary policy intervention—in short, that inflation would be transitory. The long-standing conventional wisdom has been that as long as inflation expectations remain well anchored, central banks can overlook temporary increases in inflation.

The "transitory" ship was crowded, with most mainstream analysts and central bank governors from advanced economies on board. There was a widespread expectation that supply conditions would improve relatively quickly, that the rapid recovery in demand would proceed smoothly, and that demand would shift from goods to services, thereby reducing inflation.

For a time, the data aligned with the transitory hypothesis. From April to September 2021, monthly readings of core inflation declined, although the pace of progress was slower than expected.

As reflected in our letters, this situation began to weaken around mid-year. Starting in October, the data diverged from the transitory hypothesis. Inflation rates rose and expanded from goods to services. It became clear that high inflation was not transitory and that strong policy responses were needed to keep inflation expectations stable. We recognized this and began to shift our policy starting in November. Financial conditions began to tighten. After gradually tapering our asset purchase program, we started raising interest rates in March 2022.

By early 2022, overall inflation exceeded 6%, and core inflation surpassed 5%. New supply shocks emerged. Russia's invasion of Ukraine led to significant increases in energy and commodity prices. The improvement in supply conditions and the shift in demand from goods to services took much longer than anticipated, partly due to further escalation of COVID-19 in the U.S. and continued disruptions to global production, including new lockdowns and extended lockdown periods in China.

High inflation is a global phenomenon, reflecting a shared experience: rapid growth in demand for goods, strained supply chains, tight labor markets, and significant increases in commodity prices. The nature of this global inflation is different from any period since the 1970s. At that time, high inflation was entrenched, which is the outcome we are determined to avoid.

By mid-2022, the labor market was extremely tight, with employment rising by over 6.5 million compared to mid-2021. As health issues began to fade, workers rejoined the labor force, partially meeting the growth in labor demand. However, labor supply remained constrained, and by the summer of 2022, the labor force participation rate was still far below pre-pandemic levels. From March to the end of 2022, the number of job vacancies was nearly double the number of unemployed, indicating a severe labor shortage.

Inflation peaked at 7.1% in June 2022.

Two years ago, I discussed from this podium that addressing inflation might bring some pain, such as rising unemployment and slowing economic growth. Some believed that controlling inflation would require a recession and prolonged high unemployment. I expressed our unconditional commitment to fully restoring price stability and to sticking with it until the job is done.

The FOMC has boldly fulfilled its responsibilities, and our actions have powerfully demonstrated our determination to restore price stability. In 2022, we raised the policy rate by 425 basis points, and in 2023, we raised it by another 100 basis points. Since July 2023, we have maintained the policy rate at its current restrictive level.

The summer of 2022 proved to be the peak of inflation. Inflation rates have decreased by 4.5 percentage points from the peak two years ago, and this decline has occurred against a backdrop of low unemployment—an encouraging and historically unusual outcome.

How did inflation decrease without a sharp rise in unemployment above the estimated natural rate of unemployment?

The supply-demand distortions caused by the pandemic and severe shocks to energy and commodity markets were significant drivers of high inflation, and their reversal has been a key part of the decline in inflation. The dissipation of these factors took much longer than expected, but ultimately played an important role in the subsequent disinflation. Our tightening monetary policy has helped moderate total demand, combined with improvements in total supply, reducing inflationary pressures while allowing economic growth to continue at a healthy pace. As labor demand also moderated, the historically high ratio of job vacancies to unemployment has returned to normal, primarily through a decline in job vacancies, without large-scale and destructive layoffs, meaning the labor market is no longer a source of inflationary pressure.

Let’s talk about the importance of inflation expectations. For a long time, standard economic models have reflected the view that as long as inflation expectations remain anchored at our target level, inflation will return to target when product and labor markets reach equilibrium, without the need for economic easing. That’s what the models say, but since the 2000s, the stability of long-term inflation expectations has not been tested by persistently high inflation. Whether inflation anchoring can be maintained remains to be seen. Concerns about de-anchoring have contributed to the view that disinflation requires economic easing, particularly in the labor market. An important conclusion from recent experience is that, driven by strong central bank actions, anchored inflation expectations can facilitate disinflation without the need for economic easing.

This narrative attributes much of the rise in inflation to an unusual collision between overheated and temporarily distorted demand and constrained supply. While researchers have different approaches and, to some extent, different conclusions, there seems to be a growing consensus that I believe attributes much of the rise in inflation to this collision.

In summary, the distortions caused by the pandemic have healed, and our efforts to moderate total demand and anchor expectations have worked together to put inflation on a sustainable path toward our 2% target.

Only with stable inflation expectations can disinflation be achieved while maintaining a strong labor market, reflecting public confidence that the central bank will gradually achieve the 2% inflation target. This confidence has been built over decades and reinforced by our actions.

This is my assessment of the events. Your views may differ.

Conclusion

I want to emphasize that the pandemic economy has proven to be different from any other economy, and there is still much to learn from this unique period. Our "Statement on Longer-Run Goals and Monetary Policy Strategy" emphasizes our commitment to reviewing our principles through a comprehensive public review every five years and making appropriate adjustments. As we begin this process later this year, we will be open to criticism and new ideas while maintaining the strengths of our framework. The limitations of our knowledge—made evident during the pandemic—require us to remain humble and questioning, focusing on learning from the past and flexibly applying those lessons to our current challenges.