Jerome Powell, the Chair of the Federal Reserve, addressed the complexities facing monetary policy at the Thomas Laubach Research Conference in Washington, D.C. on Thursday. His remarks underscored the Fed’s commitment to a thoughtful review process focusing primarily on communication strategies. Powell emphasized that as economic conditions evolve, the Federal Reserve faces a difficult balancing act between bolstering employment and controlling inflation, particularly in light of external factors such as tariffs and potential supply shocks.
Powell’s speech reiterated common themes we’ve heard from him since the beginning of the year. He cautioned that any changes to policy would be difficult for the central bank. He explained that inflationary pressures, as seen recently, pushed the Fed’s hand and forced a recalibration to justify how monetary policy should be conducted. Initially, Powell described the 2021 inflation surge as “transitory,” as he thought it was a result of pandemic-related market factors. Now he understands that these times call for a more complicated approach.
Powell said the next review will take a broader look at the forces shaping monetary policy. He did not commit to a concrete completion date. He mentioned that he expects the review to be completed in “coming months.” This review will be closely watched, providing cues about how the Fed will steer its monetary policy through a rapidly changing economic landscape.
During his remarks, Powell highlighted the likelihood of higher long-term interest rates as the economy undergoes transformations and policy shifts. He acknowledged that the landscape has shifted dramatically in the last five years, implying a break from old monetary playbooks. Long-term inflation expectations remain well anchored around the Fed’s 2% target. As Powell cautions, we can’t hope for an easy return to near-zero interest rates in the near future.
According to Powell, raising tariffs harms economic growth and pushes up inflation. He pointed out the quandary that these tariffs have created for the Federal Reserve. These tariffs hinder the Fed’s ability to achieve its full employment mandate and blunts efforts to control rising prices. He steered clear of explicitly calling out former President Donald Trump’s tariffs. His statements certainly underscored worries about their future impact on economic conditions.
Additionally, Powell outlined a “flexible average inflation target” approach, which would permit inflation to exceed typical levels to foster full and inclusive employment. This approach is intended to give the Fed space to pursue its core mission of fighting inflation while still making employment a focus.
Powell’s comments at the Jackson Hole annual retreat were notable. His comments reflect the Federal Reserve’s serious desire to continue bending its policies in the direction of changing economic realities. The operational review he announced should help shape the way the central bank talks about its policy choices and actions in the future.