On August 23, Federal Reserve Chairman Powell delivered a speech on the outlook for the U.S. economy at Jackson Hole. He said that the time for policy adjustments has come, the direction of policy is clear, and the timing and pace of interest rate cuts will depend on data, prospects and the balance of risks. According to the Wall Street Journal, Federal Reserve Chairman Powell sent the strongest signal of interest rate cuts so far, saying that he intends to take action to avoid further weakness in the U.S. labor market. It is widely expected that the Fed will cut interest rates at its September meeting. Powell's remarks on Friday almost put an end to the Fed's historic anti-inflationary actions. Two years ago, Powell expressed his willingness to accept a recession as the price of reducing inflation on the same stage. Powell's attitude this time was far less ambiguous than in the press conference after the last meeting. At that time, Powell said that the Fed needed more data to be confident that inflation would fall. Friday's speech showed that he now has this data. Affected by this, Bitcoin rose by $900 in the short term, once breaking through $62,000 per coin, up 2.69% on the day.

Here is the full text of Powell's speech: Four and a half years after the outbreak, the most severe economic distortions related to the pandemic are receding. Inflation has declined significantly. The labor market is no longer overheated and is now looser than before the pandemic. Supply constraints have normalized. The balance of risks to our two tasks has shifted. Our goal is to restore price stability while maintaining a strong labor market and avoiding sharp increases in unemployment, which is characteristic of earlier deflationary periods when inflation expectations were less anchored. We have made great progress toward this outcome. While the task is not yet complete, we have made great progress toward this goal. Today, I will first talk about the current economic situation and the future path of monetary policy. I will then discuss economic events since the outbreak of the epidemic, exploring why inflation has risen to levels not seen in a generation and why inflation has fallen so much while unemployment has remained low.

Let’s begin with the current situation and the near-term policy outlook. For most 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 on reducing inflation, and rightly so. Prior to this event, most Americans today had not experienced the pain of a sustained period of high inflation.

Inflation has brought great hardship, especially to those who are least able to pay the higher costs of necessities such as food, housing and transportation. The stress and sense of unfairness caused by high inflation still linger today. Tight monetary policy can help restore the balance between aggregate supply and aggregate demand, ease inflationary pressures and stabilize inflation expectations.

Inflation is now closer to our objective, with prices rising 2.5 percent over the past 12 months. After a pause earlier this year, we have continued to move toward our 2 percent inflation objective. My confidence that inflation can return to 2 percent on a sustainable basis has increased. On employment, in the years before the pandemic, we saw the enormous benefits that long-standing strong labor market conditions can bring to society: low unemployment, high participation rates, historically low racial employment gaps, and low, stable inflation, with healthy real wage growth increasingly concentrated among low-income people. Today, the labor market has cooled substantially from its prior overheating.

The unemployment rate began rising more than a year ago and is now 4.3%—still low by historical standards but almost a full percentage point above its level at the beginning of 2023. Most of the increase in the unemployment rate has occurred in the past six months. So far, the increase in the unemployment rate has not been the result of increased layoffs that typically occur in a downturn. Instead, the increase in the unemployment rate primarily reflects a sharp increase in the supply of workers and a slowdown in the previously frenetic pace of hiring. Even so, the cooling of labor market conditions is evident. Job growth remains strong but has slowed this year. Job openings have fallen, and the ratio of job openings to unemployed people has returned to its pre-pandemic range.

Hiring and quitting rates are now below their levels in 2018 and 2019. Nominal wage gains have slowed. All in all, labor market conditions are now cooler than they were before the pandemic in 2019, when inflation was below 2%. It seems unlikely that the labor market will become a source of rising inflationary pressures anytime soon. We do not seek or welcome a further cooling of labor market conditions. Overall, the economy continues to grow at a solid pace. But inflation and labor market data suggest a changing landscape. Upside risks to inflation have diminished. Downside risks to employment have increased.

As we emphasized in our last FOMC statement, we are mindful of the risks to both sides of our dual mandate. The time has come for a policy adjustment. The way forward is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks. As we make further progress toward price stability, we will do everything we can to support a strong labor market. With appropriate easing of policy constraints, there is every reason to believe that the economy will return to 2 percent inflation while maintaining a strong labor market. The current level of the policy rate gives us ample room to address any risks we may face, including the risk of further weakening in labor market conditions.

Let’s now look at why inflation rose, and why it fell so much while unemployment remained low. There is a growing body of research on these questions, and now is a good time to discuss them. Of course, it is too early to make a definitive assessment. This period will still be analyzed and debated long after we are gone.

The arrival of the pandemic quickly shut down economies around the world. It was a time of great uncertainty and severe downside risks. As often happens in times of crisis, Americans adapted and innovated. Governments responded in extraordinary ways, notably the unanimous passage of the CARES Act by Congress. At the Federal Reserve, we used our authority to an unprecedented extent to stabilize the financial system and help avoid a depression. After a historically deep but short recession, the economy began to grow again in mid-2020. As the risk of a severe and prolonged recession receded and the economy reopened, we faced the risk of a repeat of the painfully slow recovery that followed the global financial crisis. Congress again 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 the recovery. Lingering concerns about the coronavirus pandemic weighed on spending on in-person services.

But pent-up demand, stimulus policies, changes in work and leisure patterns, and additional savings from limited spending on services have led to a historic surge in consumer spending on goods. The pandemic has also wreaked havoc on supply conditions. Eight million people left the labor force at the start of the pandemic, and at the beginning of 2021 the size of the labor force was still 4 million below its pre-pandemic level. The labor force will not return to its pre-pandemic trend until mid-2023. Supply chains have been thrown into disarray by the loss of workers, disruptions to international trade links, and structural changes in the composition and level of demand.

Obviously, this was nothing like the slow recovery that followed the global financial crisis. Inflation followed. After running below target in 2020, inflation surged in March and April 2021. The initial burst of inflation was concentrated rather than broad-based, with sharp price increases in goods such as automobiles that were in short supply. My colleagues and I judged from the outset that these pandemic-related factors would not persist and that the sudden rise in inflation was therefore likely to pass quickly and require no monetary policy response—in short, that the rise in inflation was likely to pass quickly and be temporary, without the need for a monetary policy response. Standard thinking has long held that central banks can appropriately respond to temporary rises in inflation as long as inflation expectations remain well anchored. “Transience” was a crowded boat, filled with most mainstream analysts and central bankers in advanced economies. The widespread expectation at the time was that supply conditions would improve quickly, demand would recover quickly, and demand would shift from goods to services, reducing inflation. For a while, the data did show that head inflation was transitory. From April to September 2021, core inflation fell month by month, albeit at a slower pace than expected. As reflected in our communications, the downward momentum began to weaken around mid-year. Starting in October, the data began to strongly argue against the assumption of temporary nature.

Inflation rose and expanded from goods to services. It became clear that high inflation was not temporary and that a strong policy response was needed if inflation expectations were to remain anchored. We recognized this and began adjusting in November. Financial conditions began to tighten, and after phasing out asset purchases, we began raising interest rates in March 2022. By early 2022, headline inflation was above 6% and core inflation was above 5%. A new supply shock emerged. The conflict between Russia and Ukraine led to a sharp increase in energy and commodity prices. The improvement in supply conditions and the rotation of demand from goods to services took much longer than expected, in part because of the further spread of the coronavirus in the United States. The coronavirus continues to disrupt global production. High inflation is a global phenomenon that reflects shared experiences: rapid growth in demand for goods, tight supply chains, tight labor markets, and sharp increases in commodity prices.

The global nature of inflation is unlike any period since the 1970s. Back then, high inflation became entrenched—an outcome we are determined to avoid. By mid-2022, the labor market is extremely tight, with employment 6.5 million higher than in mid-2021. Rising labor demand is met in part by workers returning to the job market after the pandemic dissipates. But labor supply remains constrained, with the labor force participation rate remaining well below its pre-pandemic level in the summer of 2022. From March 2022 to the end of the year, there were nearly twice as many job openings as unemployed people, indicating a severe labor shortage. Inflation peaks at 7.1% in June 2022. Two years ago, I discussed from this podium the possibility that addressing inflation would be painful, with higher unemployment and slower growth.

Some argued that a recession and prolonged periods of high unemployment were necessary to control inflation. I said then that the Federal Reserve was unconditionally committed to restoring price stability across the board and to staying there until the job was done. The Federal Open Market Committee has unhesitatingly fulfilled our responsibility, and our actions have powerfully demonstrated our commitment to restoring price stability. We raised our policy rate by 425 basis points in 2022 and by another 100 basis points in 2023. We have held our policy rate at its current restrained level since July 2023. The summer of 2022 proved to be the peak of inflation. The decline in inflation of 4.5 percentage points from its peak two years earlier occurred against a backdrop of low unemployment—a welcome and historically unusual outcome. How did inflation decline without a sharp rise in unemployment above its natural level? Pandemic-related supply and demand distortions, as well as severe shocks to energy and commodity markets, were important drivers of high inflation, and the reversal of these factors was a key part of the decline in inflation. The unwinding of these factors took longer than expected but ultimately played an important role in the subsequent decline in inflation. Our restrictive monetary policy has helped to control aggregate demand while improving aggregate supply, thereby reducing inflationary pressures while the economy continues to grow at a healthy rate. As labor demand has also slowed, vacancies are at historically high levels relative to the unemployment rate, and the labor market has normalized primarily through declining vacancies, without large, disruptive layoffs, making the labor market no longer a source of inflationary pressure. A crucial word about inflation expectations.

Standard economic models have long reflected the view that as long as inflation expectations are anchored at our goal, inflation will return to our goal when product and labor markets reach equilibrium, without the need for economic weakness. Models say so, but the stability of long-term inflation expectations since the 2000s has not been tested by persistent bouts of high inflation. Whether the inflation “anchor” will hold is far from certain. Concerns about unanchoring have fueled the view that a slowdown in the economy, especially in the labor market, is required for inflation to recede. An important lesson from recent experience is that firmly anchored inflation expectations, combined with strong central bank actions, can facilitate a retreat in inflation without the need for a slowdown. This narrative attributes much of the rise in inflation to an extraordinary conflict between overheated and temporarily distorted demand and limited supply. Although researchers differ in their approaches and, to some extent, in their conclusions, a consensus seems to be emerging that I believe attributes much of the rise in inflation to these collisions. In sum, the combination of recovery from the distortions of the pandemic, our efforts to control aggregate demand, and anchoring inflation expectations has put inflation on a sustainable path to our 2 percent goal. Achieving a decline in inflation while maintaining a strong labor market is only possible if inflation expectations are anchored, reflecting the public's confidence that the central bank will deliver inflation around 2% over time. This confidence has been built over decades and reinforced by our actions. This is my assessment of events. Your views may differ.

in conclusion

Finally, let me emphasize that the pandemic economy has proven unlike other economic periods, and there is still much to learn from this extraordinary period. Our statement on longer-run goals and monetary policy strategy emphasizes our commitment to assessing our principles through a thorough public review every five years and making appropriate adjustments. When we begin that process later this year, we will be open to criticism and new ideas while preserving the strengths of our framework. The limits of our knowledge—so evident during the pandemic—suggest that we need to be humble and questioning, focused on learning lessons from the past and applying them flexibly to our current challenges.