Federal Reserve leaders Jerome Powell and Philip Jefferson have recently shared their insights on the current economic landscape, highlighting the complexities of inflation, trade policy, and growth projections. They delivered their addresses at a series of events around Washington, D.C., and New York City. At these roundtables, they drew attention to the Federal Reserve’s tight and growing monetary policy in a shifting economic environment.
In today’s testimony at the Thomas Laubach Research Conference, Powell pointed to an astonishing inflation collapse. In reality it has plummeted from 7.2% down to a measly 2.2% currently. He described this shift as a “welcome and historically unusual result,” achieved without a corresponding rise in unemployment. Powell noted that helpful communication from the Fed would go a long way. We now experience less predictable, more frequent shocks of new varieties to the economy.
Jefferson, the Federal Reserve Vice Chair, spoke at the Annual Conference of Second District Directors and Advisors at the New York Fed. He recognized the growing risks to business sentiment due to the effects of current trade policy. Jefferson has already scaled back his hopes for new jobs and investment this year. He’s still bullish and thinks we’re going to see growth and not a recession.
Economic Growth and Trade Policy Risks
In a letter opposing tariff increases, Jefferson warned about the dangers of permanent tariff hikes. He suggested that these tariffs could undermine efforts to achieve disinflation and could even cause a temporary increase in inflation. He stated,
“If the increases in tariffs announced so far are sustained, they are likely to interrupt progress on disinflation and generate at least a temporary rise in inflation.”
Vice Chair Barr expanded upon the state of play fostering inflationary pressures, emphasizing that uncertainty is very much still present. He warned that tariffs could impose long-term upward pressure on inflation. That all hinges on a number of factors, including the execution of trade policies and the response of supply chains.
Jefferson understood that all the new tariff proclamations were injecting doubt and confusion into government policy. In turn, he resolved to recalibrate his economic expectations.
“Tariff announcements and heightened uncertainty about government policies in general are the dominant economic developments of more recent weeks and have caused me to look carefully at my forecasts.”
Evolving Economic Landscape
Powell and Jefferson both admitted that the economic landscape is markedly different from what it was in 2020. Jefferson reminded the audience that we are living in very different times than those during historic formative periods. He had the Great Depression and the Great Inflation in mind, in particular. He stated,
“The challenges presented by the Great Depression differ from those of the Great Inflation and the Great Moderation, which in turn differ from the ones we face today.”
Jefferson’s vision called for an adaptive approach to monetary policy that responds to these new and shifting challenges. He emphasized that although he hopes for sustained economic growth, risks related to inflation require a prudent path forward.
Powell went on to strongly affirm these beliefs. He focused on the necessity for the Federal Open Market Committee (FOMC) to adapt its strategies and tools to be in keeping with today’s economic realities. He stated,
“The structure of the economy evolves over time, and monetary policymakers’ strategies, tools, and communications need to evolve with it.”
The Importance of Effective Communication
Powell’s comments underscore how critical clear and credible communication from the Federal Reserve is, particularly in times of high uncertainty. He added that communication will be key, and central banks’ll need to communicate their future expectations to shape the narrative.
He emphasized the need for a solid framework that could outlast multiple economic cycles. At the same time, it needs to be malleable enough to change as our understanding changes. According to Powell,
“A framework should be robust to a broad range of conditions but also needs to be updated periodically as the economy and our understanding of it evolve.”
As noted by the Chairman, we are in a ‘new era’ for central banks. This new era will be characterized by more frequent and possibly permanent supply-side shocks. He accepted this occurrence as a giant, ongoing fault line for the country and lawmakers on both sides of the aisle.