On August 23, Caixin reported that on Friday local time, Federal Reserve Chairman Powell delivered a speech at the annual Jackson Hole meeting, a moment eagerly anticipated by global markets. The Fed Chairman publicly announced that the Fed is about to officially enter a rate-cutting cycle.

The following is the full text of the speech:

Today, 4 and a half years after the outbreak of the COVID-19 pandemic, the economic distortions related to the pandemic are gradually fading from their most severe state. The inflation rate has fallen significantly, the labor market is no longer overheated, and the current market conditions are more relaxed than before the pandemic. Supply constraints have returned to normal, and the risk balance facing our dual mandate has also changed. Our goal is to restore price stability while maintaining a strong labor market, avoiding the significant rise in unemployment rates that occurred during past periods of unstable inflation expectations. We have made considerable progress in achieving this goal. Although the task is not yet complete, we have indeed made a lot of progress.

Today, I will first discuss the current economic situation and the path forward for monetary policy. Then, I will discuss the economic events since the start of the pandemic, exploring why inflation has risen to levels not seen in generations and why inflation has decreased so much while unemployment remains low.

Short-term Outlook for Policy

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

For most of the past three years, the inflation rate has been well above our 2% target, and the labor market conditions have been extremely tight. The Federal Open Market Committee (FOMC) has always focused on reducing inflation, which is entirely correct. Prior to this event, most living Americans had never experienced the pain of sustained high inflation. Inflation has brought great difficulties, especially for those struggling with rising costs of essential goods such as food, housing, and transportation. High inflation has triggered pressure and a persistent sense of unfairness that continues to this day.

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 getting closer to our policy target, with prices rising 2.5% in the past 12 months. Progress toward our 2% target has resumed after a pause (slowing) earlier this year. I am increasingly confident that inflation is steadily recovering on the path to 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 clearly cooled down and is no longer as overheated as before. The unemployment rate began to rise over a year ago and is now at 4.3%, still historically low but nearly one percentage point higher than in early 2023. Most of the increase has occurred in the past six months.

So far, the rise in unemployment has not been due to widespread layoffs typically seen during an economic downturn, but rather primarily reflects significant increases in labor supply and a slowdown in hiring. Nevertheless, the labor market cooling remains apparent. Job growth remains solid but has slowed this year. Job openings have decreased, and the ratio of job openings to unemployment has returned to pre-pandemic levels. Recruitment and resignation rates are now lower than in 2018 and 2019. Nominal wage growth has slowed. Overall, the labor market is now much looser than in 2019 (before the pandemic outbreak) 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, the inflation and labor market data indicate that the situation is evolving. The upside risks to inflation have diminished, while the downside risks to employment have increased. As we emphasized in our last FOMC statement, we are focused on the risks to our dual mandate.

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

We will make every effort to support a strong labor market while continuing to move towards our goal of price stability. With the appropriate reduction in policy restrictions, there is 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 sufficient room to address any risks, including the risk of further deterioration in labor market conditions.

Fluctuations in inflation

Now let's turn to the discussion of why inflation is rising, and why inflation is significantly declining while the unemployment rate remains low. Research on these questions is increasing, and now is a good time to discuss them. Of course, it is still too early to make a definitive assessment. This period will be analyzed and discussed for many years to come.

The arrival of the COVID-19 pandemic quickly led to an economic shutdown globally. This is a period filled with uncertainty and severe downside risks. In times of crisis, Americans have always adapted and innovated. The government has made an unprecedented strong response, particularly in the United States, where Congress unanimously passed the CARES Act. At the Federal Reserve, we have used our power with unprecedented force to stabilize the financial system and help prevent an economic downturn.

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

The Congress provided a large amount of additional fiscal support at the end of 2020 and the beginning of 2021. In the first half of 2021, consumer spending recovered strongly. The continued pandemic shaped the pattern of the recovery in the consumer market. Concerns about the ongoing pandemic affected face-to-face service consumption. However, pent-up demand, stimulus policies, changes in work and leisure patterns due to the pandemic, and the additional savings from restricted service consumption have all contributed to a historic surge in consumer goods spending.

The pandemic has also caused severe disruptions to the supply situation. At the onset of the pandemic, 8 million people dropped out of the labor market, and by early 2021, the labor force was still 4 million less than before the pandemic. The labor force did not recover to pre-pandemic trends until mid-2023.

Supply chains have been in chaos due to loss of workers, disruptions in international trade connections, and dramatic changes in demand structures and levels. Clearly, this is very different from the slow recovery after the global financial crisis.

Inflation followed. After inflation rates were below target in 2020, inflation surged in March and April 2021. The initial surge in inflation was concentrated in goods with supply shortages, such as motor vehicles, where prices rose significantly. Initially, my colleagues and I believed that these pandemic-related factors would not persist, so we thought that the sudden rise in inflation would pass quickly without the need for monetary policy intervention - in short, inflation was temporary. The longstanding conventional view has been that as long as inflation expectations remain stable, central banks can ignore temporary increases in inflation.

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

For a period of time, the data is consistent with the assumption of temporary inflation. From April to September 2021, the monthly reading of core inflation has been declining, although progress has been slower than expected.

By mid-year, the support for this assumption began to weaken, as reflected in our communication. Starting from October, the data no longer supports the assumption of temporary inflation. Inflationary pressures have started to expand from goods to the services sector. It is clear that high inflation is not a temporary phenomenon, and strong policy responses are needed to maintain inflation expectations stability. We have recognized this and started adjusting our policies since November. Financial conditions have started to tighten. After gradually ending asset purchases, we began raising interest rates in March 2022.

By early 2022, the overall inflation rate had exceeded 6%, and the core inflation rate had exceeded 5%. New supply shocks have emerged. The outbreak of the Russo-Ukrainian war led to significant increases in energy and commodity prices. The improvement in supply conditions, as well as the longer-than-expected shift in demand from goods to services, partly due to the further development of the pandemic in the United States. The pandemic also continues to disrupt production in major economies globally.

High inflation rates are a global phenomenon, reflecting a shared experience: rapid growth in demand for goods, supply chain constraints, tight labor markets, and sharp increases in commodity prices. Inflation at a global level is different from any period since the 1970s. At that time, high inflation was deeply entrenched - something we are determined to avoid.

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

Two years ago, on this podium, I discussed some of the pain that could come with dealing with inflation, such as rising unemployment and slowing economic growth. Some people believed that controlling inflation would require a recession and long-term high unemployment rates. I expressed our unwavering commitment to fully restore price stability and vowed to carry on until the task is completed.

The FOMC did not retreat and fulfilled our responsibilities with determination. Our actions strongly demonstrate our commitment to restoring price stability. We raised the policy interest rate by 425 basis points in 2022 and an additional 100 basis points in 2023. Since July 2023, we have maintained the policy interest rate at the current tightening level.

The summer of 2022 became the peak of inflation. In the span of two years, the inflation rate dropped by 4.5 percentage points from its peak, all while the unemployment rate remained low, which is a popular and historically uncommon outcome.

Why has inflation decreased but unemployment rates have not significantly increased?

Distortions in 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 fading of these factors (over time) is longer than expected, but ultimately played an important role in the subsequent decline in inflation. Our tight monetary policy has led to a moderate decrease in total demand, combined with an improvement in total supply, reducing inflationary pressures, while allowing the economy to continue growing at a healthy pace. With the slowdown in labor demand, job vacancies relative to historically high unemployment levels have normalized, primarily through a reduction in job vacancies, without experiencing large-scale and disruptive layoffs, making the labor market no longer a source of inflationary pressure.

It is also important to mention the critical importance of inflation expectations. The standard economic model has long held the view that inflation will return to target levels as long as the product and labor markets are balanced, without the need for economic slowdown, as long as inflation expectations remain stable. This is what the model suggests, 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 exacerbated the view that a slowdown in the economy, especially in the labor market, is needed for inflation to decline. A significant insight from recent experience is that stable inflation expectations, combined with strong central bank action, can achieve a decline in inflation without the need for an economic slowdown.

This narrative attributes the rise in inflation mainly to the collision of overheated and temporarily distorted demand with constrained supply. Although researchers differ in methodology and conclusions, there seems to be a consensus forming that attributes the main reasons for rising inflation to this collision. Overall, as markets recover from distortions caused by the epidemic, our efforts to moderately restrain total demand, as well as anchor expectations, are collectively making inflation increasingly evident towards a sustainable path to reach our 2% target.

The achievement of inflation decrease while maintaining a strong labor market is only possible with anchored inflation expectations, reflecting public confidence in the central bank's ability to achieve 2% inflation within a timeframe. This confidence has been built over decades and has been strengthened through our actions.

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

Conclusion

Finally, I would like to emphasize that the economic impacts of the epidemic have proven to be unlike any other period in the past, with many valuable lessons to be learned from this extraordinary time. The Federal Reserve has committed in the 'Longer-Run Goals and Monetary Policy Strategy Statement' to review our principles every five years through a comprehensive public review and make appropriate adjustments. 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 - as evident during the epidemic - require us to remain humble and questioning, focusing on learning lessons from past experiences, and flexibly applying them to current challenges.

Editor/Somer