Powell Jackson Hole Speech Full Text

Since the beginning of this year, against the backdrop of widespread changes in economic policy, the U.S. economy has demonstrated resilience. In terms of the Fed's dual mandate objectives, the labor market remains close to full employment, and while inflation is still somewhat elevated, it has significantly retreated from the post-pandemic highs. Meanwhile, the balance of risks seems to be shifting.

In my speech today, I will first discuss the current economic situation and the recent outlook for monetary policy. Then, I will turn to the results of our second public assessment of the monetary policy framework reflected in the revised "Long-Term Goals and Monetary Policy Strategy Statement" that we are releasing today.

Current Economic Conditions and Recent Outlook

A year ago, when I stood on this podium, the economy was at a turning point. Our policy interest rates have been maintained at levels between 5.25% and 5.5% for over a year. This restrictive policy stance is appropriate and helps to reduce Inflation and promote a sustainable balance between aggregate demand and aggregate supply. Inflation is very close to our target, and the labor market has cooled from its previously overheated state. The upward risks to Inflation have diminished. However, the unemployment rate has risen by nearly one percentage point, a situation that has historically occurred only during recessions. In the subsequent three Federal Open Market Committee (FOMC) meetings, we recalibrated our policy stance, laying the groundwork for the labor market to maintain balance at levels close to full employment over the past year (Figure 1).

This year, the economy is facing new challenges. The significantly increased tariffs among our trading partners are reshaping the global trade system. Tighter immigration policies have led to a sudden slowdown in labor force growth. In the longer term, changes in tax, spending, and regulatory policies may also have significant impacts on economic growth and productivity. There is immense uncertainty about where all these policies will ultimately lead and what their lasting effects on the economy will be.

Changes in trade and immigration policies are simultaneously affecting demand and supply. In this environment, it is difficult to distinguish between cyclical developments and trend (or structural) developments. This distinction is crucial because monetary policy can strive to stabilize cyclical fluctuations but is powerless to alter structural changes.

The labor market is a good example. The July employment report released earlier this month shows that the average number of jobs added per month over the past three months has slowed to just 35,000, down from 168,000 per month during 2024 (Figure 2). This slowdown is much larger than the assessment from just a month ago, as the early data from May and June were significantly revised down. However, this does not seem to have led to the large loosening of the labor market that we hope to avoid. Although the unemployment rate ticked up slightly in July, it remains at a historically low level of 4.2% and has been relatively stable over the past year. Other indicators of labor market conditions have also changed little or have only softened moderately, including the ratios of quits, layoffs, job vacancies to unemployment, and nominal wage growth. The supply and demand for labor have both softened, significantly reducing the "breakeven" job creation rate needed to keep the unemployment rate steady. In fact, with a sharp decline in the number of immigrants, labor growth has noticeably slowed this year, and the labor force participation rate has also declined in recent months.

Overall, although the labor market appears to be in a balanced state, this is a peculiar equilibrium resulting from a significant slowdown in both labor supply and demand. This unusual situation indicates that the downside risks to employment are rising. If these risks materialize, they could quickly manifest in the form of a sharp increase in layoffs and rising unemployment rates.

At the same time, GDP growth in the first half of this year has significantly slowed to a level of 1.2%, which is about half of the 2.5% growth rate projected for 2024 (Figure 3). The slowdown in growth mainly reflects a slowdown in consumer spending. Similar to the labor market, the partial slowdown in GDP may reflect a slowdown in supply or potential output growth.

Turning to inflation, higher tariffs have begun to push up prices for certain categories of goods. Estimates based on the latest available data show that overall PCE prices increased by 2.6% in the 12 months ending in July. Excluding the volatile food and energy categories, core PCE prices rose by 2.9%, higher than a year ago. Within core inflation, prices for goods increased by 1.1% over the past 12 months, which marks a significant shift compared to the modest decline expected during 2024. In contrast, inflation for housing services continues to trend downward, while the level of inflation for non-housing services remains slightly above the historical level consistent with 2% inflation.

The impact of tariffs on consumer prices is now clearly visible. We expect these effects to accumulate over the next few months, but there is a high degree of uncertainty regarding their timing and magnitude. For monetary policy, an important question is whether these price increases could substantially increase the risk of persistent inflation problems. A reasonable baseline scenario is that their impact will be relatively short-lived—that is, a one-time change in price levels. Of course, "one-time" does not mean "completed at once." The increase in tariffs takes time to transmit throughout the entire supply chain and distribution network. In addition, tariff rates are still changing, which may prolong the adjustment process.

However, the price upward pressure caused by tariffs may also trigger more persistent Inflation dynamics, which is a risk that needs to be assessed and managed. One possibility is that workers, whose real income declines due to rising prices, present and obtain higher wage demands from employers, leading to adverse wage-price dynamics. Given that the labor market is not particularly tight and faces increasing downside risks, this outcome seems less likely to occur.

Another possibility is that inflation expectations may rise, pushing actual inflation upward as well. Inflation has been above our target for over four years and remains a prominent concern for households and businesses. However, based on market-based and survey indicators, long-term inflation expectations seem to remain well anchored and are consistent with our 2% long-term inflation target.

Of course, we cannot take it for granted that inflation expectations will remain stable. No matter what happens, we will not allow a one-time rise in price levels to evolve into a persistent inflation problem.

Overall, what implications does this have for monetary policy? In the short term, inflation risks are skewed to the upside, while employment risks are skewed to the downside—this is a challenging situation. When our objectives are in such tension, our framework requires us to balance both aspects of our dual mandate. Our policy rate is now closer to neutral by about 100 basis points than it was a year ago, and the stability of the unemployment rate and other labor market indicators allows us to proceed cautiously when considering a change in policy stance. Nevertheless, in a restrictive policy environment, the baseline outlook and evolving risk balance may necessitate adjustments to our policy stance.

Monetary policy does not have a preset path. Members of the Federal Open Market Committee will make these decisions solely based on their assessment of the data and its impact on the economic outlook and risk balance. We will never deviate from this approach.

Evolution of the Monetary Policy Framework

Turning to my second topic, our monetary policy framework is built on the unwavering mission granted to us by Congress to foster maximum employment and stable prices for the American people. We remain fully committed to fulfilling our statutory mission, and revisions to our framework will support this mission under a wide range of economic conditions. Our revised "Statement on Longer-Run Goals and Monetary Policy Strategy," which we call the consensus statement, describes how we pursue our dual mandate objectives. It is designed to provide the public with a clear understanding of how we think about monetary policy, and this understanding is crucial for transparency and accountability, as well as for making monetary policy more effective.

The changes we made in this assessment are a natural evolution, rooted in our deepening understanding of the economy. We continue to build upon the initial consensus statement passed in 2012 under the leadership of Chairman Ben Bernanke. The revised statement today is the result of our second public assessment of the framework, conducted every five years. This year's assessment includes three elements: the "Fed Listens" events held at national reserve banks, a flagship research conference, and discussions and deliberations by decision-makers supported by staff analyses at a series of FOMC meetings.

When conducting this year's assessment, a key objective is to ensure that our framework is applicable to a wide range of economic conditions. At the same time, the framework needs to evolve with changes in the economic structure and our understanding of these changes. The challenges posed by the Great Depression are different from those during the Great Inflation and Great Stagflation periods, and these are also different from the challenges we face today.

During the last assessment, we lived in a new normal characterized by interest rates close to the effective lower bound (ELB), along with low growth, low inflation, and a very flat Phillips curve — which means that inflation responds insensitively to slack in the economy. For me, a statistic that captures the features of that era is that our policy interest rates remained at the effective lower bound for as long as seven years following the outbreak of the global financial crisis (GFC) at the end of 2008. Many of you present will remember the painful experience of weak growth and an extremely slow recovery during that time. It seemed highly likely that even if the economy experienced a mild recession, our policy interest rates would quickly return to the effective lower bound and might remain there for a long time again. At that point, inflation and inflation expectations could decline in a weak economy, raising real interest rates while nominal rates were pinned near zero. Higher real interest rates would further weigh on employment growth and exacerbate downward pressure on inflation and inflation expectations, triggering an adverse dynamic.

The economic conditions that pushed policy interest rates to the effective lower bound and drove the 2020 framework changes are considered rooted in slowly changing global factors that will persist for a long time—if not for the pandemic, they likely would have. The 2020 consensus statement included several characteristics addressing the increasingly prominent risks associated with the effective lower bound over the past two decades. We emphasized the importance of anchoring long-term inflation expectations to support our dual goals of price stability and full employment. Drawing on a substantial body of literature on strategies to mitigate risks related to the effective lower bound, we adopted a flexible form of average inflation targeting—a "make-up" strategy to ensure that inflation expectations remain well-anchored even under the constraints of the effective lower bound. Specifically, we indicated that following a period of inflation persistently below 2%, appropriate monetary policy may aim for a moderate level slightly above 2% for some time.

As a result, the reopening after the pandemic did not bring low inflation and an effective lower bound on interest rates, but instead the highest inflation in 40 years for the global economy. Like most other central banks and private sector analysts, we believed until the end of 2021 that inflation would dissipate fairly quickly without us significantly tightening our policy stance (Figure 5). When it became clear that this was not the case, we responded forcefully by raising our policy interest rate by 5.25 percentage points within 16 months. This action, along with the easing of supply disruptions during the pandemic, brought inflation closer to our target without the painful rise in unemployment that accompanied past efforts to combat high inflation.

Elements of the Revised Consensus Statement

This year's assessment considered the evolution of economic conditions over the past five years. During this period, we have seen that the inflation situation can change rapidly in the face of significant shocks. Furthermore, the current level of interest rates is much higher than during the period between the global financial crisis and the pandemic. In a situation where inflation is above target, our policy interest rate is restrictive—in my view, moderately restrictive. We cannot determine where interest rates will stabilize in the long term, but the neutral level may now be higher than in the 2010s, reflecting changes in productivity, demographics, fiscal policy, and other factors affecting the balance of savings and investment (Figure 6). During the assessment period, we discussed concerns from the 2020 statement regarding the effective lower bound of interest rates, which could complicate our communication in response to high inflation. We concluded that an emphasis on a set of overly specific economic conditions may have led to some confusion, and thus, we made several important modifications to the consensus statement to reflect this insight.

First, we removed the wording indicating that the effective lower bound on interest rates is a defining characteristic of the economic landscape. Instead, we pointed out that our "monetary policy strategy aims to promote maximum employment and stable prices under a broad range of economic conditions." The difficulties of operating near the effective lower bound remain a potential concern, but it is not our main focus. The revised statement reiterates that the Committee is prepared to use all of its tools to achieve its maximum employment and price stability goals, especially when the federal funds rate is constrained by the effective lower bound.

Secondly, we have reverted to the framework of flexible inflation targeting and abandoned the "compensatory" strategy. It has become irrelevant to intentionally allow inflation to moderately overshoot. The inflation that arrived a few months after we announced the modification of the 2020 consensus statement was neither intentional nor moderate, and I publicly acknowledged this in 2021.

Well-anchored inflation expectations are crucial for successfully lowering inflation without causing a sharp rise in the unemployment rate. Anchored expectations can help bring inflation back to target during adverse shocks that drive up inflation, and limit deflation risks during economic weakness. Moreover, they allow monetary policy to support full employment during recessions without jeopardizing price stability. Our revised statement emphasizes our commitment to taking strong action to ensure that long-term inflation expectations remain well-anchored to benefit both aspects of our dual mandate. The statement also notes that "price stability is the foundation of a sound and stable economy and supports the well-being of all Americans." This theme has been loudly and clearly reflected in our "Fed Listens" events. The painful reminders of the past five years have highlighted the difficulties brought on by high inflation, particularly for those least able to bear the higher costs of necessities.

Third, our 2020 statement said that we would focus on alleviating "shortfalls" in relation to full employment, rather than "deviations." The use of the term "shortfalls" reflects the view that our real-time assessment of the natural rate of unemployment—what we call "full employment"—is highly uncertain. In the later stages of the recovery following the global financial crisis, employment remained above mainstream estimates of its sustainable level for a long time, while inflation consistently stayed below our 2% target. In the absence of inflationary pressures, there may be no need to tighten policy solely based on real-time estimates of an uncertain natural rate of unemployment.

We still hold this view, but the use of the term "insufficient" has not always been interpreted as intended, leading to communication challenges. In particular, the use of the term "insufficient" was not meant to commit to permanently forgoing preemptive actions or to ignore the tightness of the labor market. Therefore, we have removed the term "insufficient" from the statement. Instead, the revised document now more accurately states that "the Committee recognizes that employment may sometimes be above real-time assessments of full employment without necessarily posing a risk to price stability." Of course, if the tightness of the labor market or other factors pose a risk to price stability, taking preemptive action may be necessary.

The revised statement also noted that full employment is "the highest level of employment that can be sustained against a backdrop of price stability." This focus on promoting a strong labor market underscores the principle that "sustaining full employment can bring broadly shared economic opportunities and benefits to all Americans." The feedback we received during the "Fed Listens" event reinforced the value of a strong labor market for American families, employers, and communities.

Fourth, in line with the removal of the term "insufficient," we have made modifications to clarify our approach during periods when our employment and Inflation targets are not complementary. In these cases, we will adopt a balanced approach to promote them. The revised statement is now more consistent with the original wording from 2012. We will take into account the degree of deviation from our targets, as well as the potential varying time spans for each target to return to levels consistent with our dual mandate. These principles guide our policy decisions today, just as they guided us during the 2022-24 period, when the deviation from our 2% Inflation target was of overriding concern.

In addition to these changes, there is also considerable continuity with past statements. The document continues to explain how we interpret the mission assigned to us by Congress and describes the policy framework we believe will best promote maximum employment and price stability. We continue to believe that monetary policy must be forward-looking and consider the lagged effects on the economy. Therefore, our policy actions depend on the economic outlook and the balance of risks facing that outlook. We continue to believe that setting a numerical goal for employment is unwise, as the level of maximum employment cannot be directly measured and will vary over time due to reasons unrelated to monetary policy.

We continue to believe that a long-term inflation rate of 2% best aligns with our dual mandate objectives. We believe that our commitment to this goal is a key factor in helping to keep long-term inflation expectations well anchored. Experience shows that a 2% inflation rate is low enough to ensure that inflation does not become a concern in household and business decision-making, while also providing some flexibility for the central bank to implement easing policies during economic downturns.

Finally, the revised consensus statement retains our commitment to conduct a public assessment approximately every five years. There is nothing magical about the five-year rhythm. This frequency allows decision-makers to re-evaluate the structural characteristics of the economy and communicate with the public, practitioners, and scholars about the performance of our framework. This is also consistent with the practices of several global peers.

Conclusion

Finally, I would like to thank Chairman Schmidt and all his hardworking staff for organizing this outstanding event every year. Including a few online appearances during the pandemic, this is my eighth time being fortunate enough to speak at this podium. Every year, this seminar provides an opportunity for the leaders of the Fed to hear the thoughts of top economic thinkers and focus on the challenges we face. Over forty years ago, attracting Chairman Volcker to this national park was a wise move by the Kansas City Fed, and I am proud to be a part of this tradition.