WASHINGTON — Federal Reserve Chairman Jerome Powell has all but declared victory in the battle against inflation and signaled that rate cuts are coming. long awaited speech Friday in Jackson Hole, Wyoming.
Under Powell’s leadership, the Fed raised interest rates to a 23-year high to curb inflation, up from a 40-year high two years ago. Inflation has been steadily decliningand investors now expect the Fed to cut rates at its next meeting in September. That expectation was effectively backed by Powell on Friday.
“My confidence has grown that inflation is on a sustainable path back to 2%,” Powell said in his speech at the Fed’s annual economic conference in Jackson Hole.
He noted that inflation, by the Fed’s preferred measure, had fallen to 2.5% from a peak of 7.1% two years ago. Measured by the better-known consumer price index, inflation has fallen from a peak of 9.1% in mid-2022 to 2.9% last month. Both are closer to the Fed’s 2% target.
Powell sounded confident that the Fed would achieve a so-called soft landing — taming inflation without causing a recession. “There’s good reason to think the economy will return to 2% inflation while maintaining a strong labor market,” he said.
Higher rates helped improve inflation control, as well as ease supply chain bottlenecks and labor shortages that led to shipping delays and higher prices, as the economy unexpectedly recovered strongly from COVID-19 lockdowns.
Powell suggested on Friday that rate cuts are all but inevitable. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the changing outlook and the balance of risks,” he said.
Last year the Fed predicted it would cut rates three times this year. But the cuts were postponed again and again because progress against inflation failed in early 2024Inflation has fallen steadily since then, giving the Fed more confidence that victory was in sight.
Powell acknowledged that he and his Fed colleagues had misjudged the inflation threat when it emerged in early 2021. At the time expected the rebound in higher prices to be short-lived — the temporary consequence of pandemic-related supply chain disruptions. The pressure, they thought, would “dissipate fairly quickly without the need for a monetary policy response — in short, that inflation would be temporary.”
They weren’t alone in their optimism. “The good ship Transitory was a busy ship,” Powell said, “with most of the mainstream analysts and advanced economy central bankers on board.”
But the word “temporary” came back to haunt the Fed as inflation proved more stubborn than expected. It spread from goods, which were plagued by supply-chain backlogs, to services, where it’s harder to dismantle without raising rates and risking severe economic pain in the form of layoffs and higher unemployment. The Fed raised rates 11 times in 2022 and 2023.
Powell acknowledged that policymakers and economists have struggled to understand and respond to an economy that has been unpredictable since COVID-19 struck in early 2020. First, the pandemic shut down commerce and companies collectively cut millions of jobs. Then the economy roared back with unexpected force, generating inflationary pressure which had been dormant since the early 1980s. When the Fed reacted too late with aggressive rate hikes, economists predicted that the cost of borrowing money would cause a painful recession. But that didn’t happen.
“The limits of our knowledge — so clearly visible during the pandemic — require humility and an inquiring spirit, focused on learning lessons from the past and flexibly applying them to our current challenges,” Powell said.