On Friday local time, Federal Reserve Chairman Powell delivered a speech at the Jackson Hole Annual Conference. As the global market was looking forward to this moment, the Federal Reserve Chairman publicly announced that the Federal Reserve is about to officially enter a rate cut cycle.

The following is the full text of the speech:

Four and a half years after the outbreak of the COVID-19 pandemic, the economic distortions associated with the pandemic are receding from their worst stages. Inflation has declined substantially, labor markets are no longer overheated, and market conditions are now easier than before the pandemic. Supply constraints have normalized, and the balance of risks to our dual mandate has shifted. We have made considerable progress toward this goal of restoring price stability while maintaining a strong labor market and avoiding the large increases in unemployment that occurred in the past when inflation expectations were less volatile. While the job is not done, we have certainly made progress.

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

Short-term policy outlook

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

For much of the past three years, inflation has been well above our 2 percent objective, and labor market conditions have been extremely tight. The Federal Open Market Committee’s (FOMC) primary focus has been, and rightly so, on reducing inflation. Prior to this episode, most Americans alive today had never experienced the pain of persistently high inflation. Inflation has caused enormous hardship, especially for those who have had the hardest time coping with the rising costs of life’s necessities, such as food, housing, and transportation. High inflation has induced stress and a sense of unfairness that persists to this day.

Our tight monetary policy has helped restore balance between aggregate supply and demand, ease inflationary pressures, and ensure that inflation expectations remain anchored. Inflation is now moving closer to our policy objective, with prices rising 2.5 percent over the past 12 months. After a pause earlier this year, progress toward our 2 percent objective has resumed. I am increasingly confident that inflation is returning to its 2 percent path in a sustainable manner.

When it comes to employment, in the years leading up to the pandemic, we saw significant benefits to society from strong labor market conditions: low unemployment, high labor force participation rates, historically low racial employment gaps, and, amid low inflation, and stable, healthy real wage growth, with these gains increasingly concentrated among low-income earners.

Today, the labor market has cooled significantly and is no longer as overheated as it was before. The unemployment rate began to rise more than a year ago and is now 4.3%, which, while still historically low, is nearly a percentage point higher than it was at the beginning of 2023. Most of the increase has occurred in the past six months.

So far, the rise in unemployment has not been caused by the large-scale layoffs that typically occur during recessions, but has mainly reflected a significant increase in the labor supply and a slowdown in hiring. Even so, the cooling of the labor market is still evident. Job growth remains solid but has slowed this year. Job vacancies have declined, and the ratio of vacancies to unemployment has returned to pre-pandemic ranges. Hiring and resignation rates are now below 2018 and 2019 levels. Nominal wage growth has slowed. Overall, the labor market is much looser now than it was in 2019 (pre-pandemic), when inflation was below 2%. The labor market seems unlikely to be a source of inflationary pressures in the short term. We do not seek or welcome further cooling of labor market conditions.

Overall, the economy is still growing at a solid pace. But inflation and labor market data suggest that the situation is evolving. Upside risks to inflation have diminished. Downside risks to employment have increased. As we emphasized in our last FOMC statement, we are focused on risks on both sides of the dual mandate.

Now is the time to adjust policy. The way forward is clear, and the timing and pace of rate cuts will depend on incoming data, the changing outlook, and the balance of risks.

We will do everything we can to support a strong labor market while continuing to move toward our price stability goal. With appropriate reductions in policy constraints, there is good reason to believe that the economy will return to a 2 percent inflation rate while maintaining a strong labor market. Our current level of the policy rate provides us with ample room to respond to any risks, including the risk of a further deterioration in labor market conditions.

The ups and downs of inflation

Let us now turn to exploring why inflation is rising, and why it is falling significantly while unemployment remains low. Research on these issues is growing, and now is a good time to discuss them. Of course, it's too early to make a definitive assessment. This period will be analyzed and discussed for many years to come.

The arrival of the coronavirus pandemic quickly shut down economies around the world. This is a time of uncertainty and significant downside risk. Americans, as always, adapt and innovate in times of crisis. Governments have responded with unprecedented force, particularly in the United States, where Congress unanimously passed the CARES Act. At the Federal Reserve, we have used our powers with unprecedented force to stabilize the financial system and help avoid a depression.

After a historically deep but brief recession, the economy began to recover in mid-2020. As the risk of a severe, prolonged recession recedes and the economy reopens, we risk a repeat of the slow recovery that followed the global financial crisis.

Congress provided substantial additional fiscal support in late 2020 and early 2021. Spending recovered strongly in the first half of 2021. The ongoing pandemic shaped the pattern of recovery. Continued concerns about the pandemic affected consumption of in-person services. But pent-up demand, stimulus policies, changes in work and leisure patterns due to the pandemic, and additional savings from limited consumption of services have combined to drive a historic surge in consumer spending on goods.

The pandemic has also wreaked havoc on supply conditions. At the start of the pandemic, 8 million people dropped out of the labor force, and by early 2021 the size of the labor force was still 4 million smaller than before the pandemic. The size of the labor force does not return to its pre-pandemic trend until mid-2023.

Supply chains have been disrupted by the loss of workers, disruption of international trade links, and a dramatic shift in the structure and level of demand. This is clearly nothing like the slow recovery after the global financial crisis.

Inflation ensued. After running below target in 2020, inflation climbed sharply in March and April 2021. The initial surge in inflation was concentrated in goods in short supply, such as motor vehicles, where price increases were particularly large. My colleagues and I initially judged that these pandemic-related factors would not persist and therefore believed that the sudden increase in inflation would probably pass quickly and would not require monetary policy intervention—in short, that inflation was temporary. The standard view has long been that central banks can ignore temporary increases in inflation as long as inflation expectations remain anchored.

The idea of ​​"temporary inflation" was widely accepted at the time, held by most mainstream analysts and central bank governors of developed economies. The general expectation was that supply conditions would improve quickly, the rapid recovery in demand would come to an end, and demand would shift from goods to services, thereby reducing inflation.

For a while, the data were consistent with the assumption of temporary inflation. From April to September 2021, the monthly readings of core inflation fell every month, although the progress was slower than expected.

By mid-year, support for this assumption began to weaken, and our communications reflected this. Starting in October, it became clear that the data no longer supported the assumption of temporary inflation. The rise in inflation began to spread from goods to services. It became clear that high inflation was not a temporary phenomenon and that a strong policy response was required if inflation expectations were to remain anchored. We recognized this and began adjusting policy in November. Financial conditions began to tighten. After gradually ending asset purchases, we initiated rate hikes in March 2022.

By early 2022, headline inflation was above 6% and core inflation was above 5%. New supply shocks emerged. The outbreak of the Russia-Ukraine war led to a sharp rise in energy and commodity prices. The improvement in supply conditions and the shift in demand from goods to services took longer than expected, partly due to the further development of the epidemic in the United States. The epidemic also continues to disrupt production in major economies around the world.

High inflation rates are a global phenomenon that reflects a shared experience: rapidly increasing demand for goods, tight supply chains, tight labor markets, and sharply rising commodity prices. Inflation around the world is unlike any period since the 1970s. Back then, high inflation was entrenched—something we were deeply committed to avoiding.

By mid-2022, the labor market is extremely tight, with labor demand increasing by more than 6.5 million since mid-2021. This increase in labor demand is partially met by workers returning to work after the pandemic subsides. But labor supply remains constrained, with the labor force participation rate still well below pre-pandemic levels by summer 2022. From March 2022 to the end of the year, job openings were almost twice the number of unemployed people, indicating a severe labor shortage. Inflation peaks in June 2022 at 7.1%.

Two years ago from this podium, I discussed some of the pain that fighting inflation might bring, such as higher unemployment and slower economic growth. Some have argued that a recession and prolonged high unemployment are needed to bring inflation under control. I expressed our unwavering commitment to restore full price stability and to keep doing so until the job is done.

The FOMC did not back down, steadfastly fulfilled our mandate, and our actions strongly demonstrated our commitment to restoring price stability. We raised our policy rate by 425 basis points in 2022 and an additional 100 basis points in 2023. We have maintained our policy rate at its current tight level since July 2023.

Inflation peaked in the summer of 2022. In two years, inflation has fallen 4.5 percentage points from its peak, while unemployment has remained low, a welcome and historically unusual result.

Why has inflation fallen but unemployment not risen significantly?

Pandemic-related supply and demand distortions and severe shocks to energy and commodity markets were important drivers of high inflation, and their reversal was a key part of the decline in inflation. These factors took longer to unwind than expected but ultimately played an important role in the subsequent decline in inflation. Our tight monetary policy has contributed to a modest decline in aggregate demand, which, combined with improvements in aggregate supply, has reduced inflationary pressures while allowing the economy to continue to grow at a healthy pace. As labor demand has slowed, the historically high level of job openings relative to unemployment has normalized through a decline in job openings without large and disruptive layoffs, making the labor market less of a source of inflationary pressure.

A word of caution here about the critical importance of inflation expectations. The long-held view of standard economic models is that inflation will return to target as long as product and labor markets are balanced—without an economic slowdown—as long as inflation expectations are anchored around our target. This is what the models say, but the stability of long-term inflation expectations has never been tested by persistently high inflation since the 2000s. It is far from certain that the inflation anchor will remain anchored. Concerns about a decoupling of inflation expectations have fueled the view that a slowdown in the economy, particularly in the labor market, is required for inflation to fall. The important lesson of recent experience is that anchored inflation expectations, combined with strong central bank action, can achieve lower inflation without requiring an economic slowdown.

This narrative attributes the rise in inflation primarily to the unusual collision between overheated and temporarily distorted demand and constrained supply. While researchers differ in their methods and in their conclusions, a consensus seems to be emerging that I believe attributes the main cause of the rise in inflation to this collision. Overall, as markets recover from the distortions caused by the pandemic, our efforts to moderately restrain aggregate demand, and the anchoring of expectations are working together to put inflation on a path that is increasingly likely to sustainably reach our 2% target.

Achieving lower inflation while maintaining a strong labor market is only possible if inflation expectations are anchored, reflecting the public's confidence that the Bank can achieve 2% inflation over time. This confidence has been built over decades and has been strengthened by our actions.

This is my assessment of events. You may have a different view.

in conclusion

Finally, I want to emphasize that the pandemic economy is proving to be unlike any previous period, and there is much to learn from this extraordinary period. The Federal Reserve committed in its Statement on Longer-Run Goals and Monetary Policy Strategy to examine our principles every five years through a comprehensive public review and make appropriate adjustments. As we begin that process later this year, we will remain open to criticism and new ideas while preserving the strength of our framework. The limits of our knowledge—made apparent during the pandemic—require us to remain humble and skeptical, focused on learning from past experience, and nimbly applying them to current challenges.