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For release on delivery
10:05 a.m. EDT (8:05 a.m. MDT)
August 25, 2023
Inflation: Progress and the Path Ahead
Remarks by
Jerome H. Powell
Chair
Board of Governors of the Federal Reserve System
at
“Structural Shifts in the Global Economy,” an economic policy symposium
sponsored by the Federal Reserve Bank of Kansas City
Jackson Hole, Wyoming
August 25, 2023
Good morning. At last year’s Jackson Hole symposium, I delivered a brief, direct
message. My remarks this year will be a bit longer, but the message is the same: It is the
Fed’s job to bring inflation down to our 2 percent goal, and we will do so. We have
tightened policy significantly over the past year. Although inflation has moved down
from its peak—a welcome development—it remains too high. We are prepared to raise
rates further if appropriate, and intend to hold policy at a restrictive level until we are
confident that inflation is moving sustainably down toward our objective.
Today I will review our progress so far and discuss the outlook and the
uncertainties we face as we pursue our dual mandate goals. I will conclude with a
summary of what this means for policy. Given how far we have come, at upcoming
meetings we are in a position to proceed carefully as we assess the incoming data and the
evolving outlook and risks.
The Decline in Inflation So Far
The ongoing episode of high inflation initially emerged from a collision between
very strong demand and pandemic-constrained supply. By the time the Federal Open
Market Committee raised the policy rate in March 2022, it was clear that bringing down
inflation would depend on both the unwinding of the unprecedented pandemic-related
demand and supply distortions and on our tightening of monetary policy, which would
slow the growth of aggregate demand, allowing supply time to catch up. While these two
forces are now working together to bring down inflation, the process still has a long way
to go, even with the more favorable recent readings.
On a 12-month basis, U.S. total, or “headline,” PCE (personal consumption
expenditures) inflation peaked at 7 percent in June 2022 and declined to 3.3 percent as of
-2July, following a trajectory roughly in line with global trends (figure 1, panel A).1 The
effects of Russia’s war against Ukraine have been a primary driver of the changes in
headline inflation around the world since early 2022. Headline inflation is what
households and businesses experience most directly, so this decline is very good news.
But food and energy prices are influenced by global factors that remain volatile, and can
provide a misleading signal of where inflation is headed. In my remaining comments, I
will focus on core PCE inflation, which omits the food and energy components.
On a 12-month basis, core PCE inflation peaked at 5.4 percent in February 2022
and declined gradually to 4.3 percent in July (figure 1, panel B). The lower monthly
readings for core inflation in June and July were welcome, but two months of good data
are only the beginning of what it will take to build confidence that inflation is moving
down sustainably toward our goal. We can’t yet know the extent to which these lower
readings will continue or where underlying inflation will settle over coming quarters.
Twelve-month core inflation is still elevated, and there is substantial further ground to
cover to get back to price stability.
To understand the factors that will likely drive further progress, it is useful to
separately examine the three broad components of core PCE inflation—inflation for
goods, for housing services, and for all other services, sometimes referred to as
nonhousing services (figure 2).
Core goods inflation has fallen sharply, particularly for durable goods, as both
tighter monetary policy and the slow unwinding of supply and demand dislocations are
1
Descriptions of PCE inflation include Board staff estimates of the July 2023 values based on available
information, including the July 2023 consumer price index and producer price index data. The July 2023
PCE inflation data will be published by the Bureau of Economic Analysis on August 31, 2023.
-3bringing it down. The motor vehicle sector provides a good illustration. Earlier in the
pandemic, demand for vehicles rose sharply, supported by low interest rates, fiscal
transfers, curtailed spending on in-person services, and shifts in preference away from
using public transportation and from living in cities. But because of a shortage of
semiconductors, vehicle supply actually fell. Vehicle prices spiked, and a large pool of
pent-up demand emerged. As the pandemic and its effects have waned, production and
inventories have grown, and supply has improved. At the same time, higher interest rates
have weighed on demand. Interest rates on auto loans have nearly doubled since early
last year, and customers report feeling the effect of higher rates on affordability.2 On net,
motor vehicle inflation has declined sharply because of the combined effects of these
supply and demand factors.
Similar dynamics are playing out for core goods inflation overall. As they do, the
effects of monetary restraint should show through more fully over time. Core goods
prices fell the past two months, but on a 12-month basis, core goods inflation remains
well above its pre-pandemic level. Sustained progress is needed, and restrictive monetary
policy is called for to achieve that progress.
In the highly interest-sensitive housing sector, the effects of monetary policy
became apparent soon after liftoff. Mortgage rates doubled over the course of 2022,
causing housing starts and sales to fall and house price growth to plummet. Growth in
market rents soon peaked and then steadily declined (figure 3).3
2
For example, 25 percent of respondents to the most recent University of Michigan Surveys of Consumers
reported that it is currently a bad time to buy a new vehicle because of higher interest rates and tighter
credit conditions, up from only 4 percent of respondents in 2021. For more information, see the
preliminary results of the August 2023 survey, available on the University of Michigan’s website at
http://www.sca.isr.umich.edu.
3
This slowing in rent growth has likely occurred for a combination of reasons. Some of it likely reflects
higher interest rates and the softening in real household income growth over the past couple of years. But
-4Measured housing services inflation lagged these changes, as is typical, but has
recently begun to fall. This inflation metric reflects rents paid by all tenants, as well as
estimates of the equivalent rents that could be earned from homes that are owner
occupied.4 Because leases turn over slowly, it takes time for a decline in market rent
growth to work its way into the overall inflation measure. The market rent slowdown has
only recently begun to show through to that measure. The slowing growth in rents for
new leases over roughly the past year can be thought of as “in the pipeline” and will
affect measured housing services inflation over the coming year. Going forward, if
market rent growth settles near pre-pandemic levels, housing services inflation should
decline toward its pre-pandemic level as well. We will continue to watch the market rent
data closely for a signal of the upside and downside risks to housing services inflation.
The final category, nonhousing services, accounts for over half of the core PCE
index and includes a broad range of services, such as health care, food services,
transportation, and accommodations. Twelve-month inflation in this sector has moved
sideways since liftoff. Inflation measured over the past three and six months has
declined, however, which is encouraging. Part of the reason for the modest decline of
nonhousing services inflation so far is that many of these services were less affected by
the normalization of dislocations due to the pandemic is likely playing a role here as well. For example, the
shifts in housing preferences related to working from home likely contributed to the increase in housing
demand reflected in the sizable earlier increases in rents. As the price effects of that demand shift played
out, the growth rate of rents would naturally decline toward its earlier trend. Finally, multifamily
construction is quite high by historical standards, and that supply coming on line has likely also taken some
pressure off market rents.
4
PCE prices for housing services include both the rents paid by tenants and an imputed rental value for
owner-occupied dwellings (measured as the income the homeowner could have received if the house had
been rented to a tenant). For additional details, see Bureau of Economic Analysis (2022), “Rental Income
of Persons,” in NIPA Handbook: Concepts and Methods of the U.S. National Income and Product
Accounts (Washington: BEA, December), pp. 12-1–12-15,
https://www.bea.gov/resources/methodologies/nipa-handbook/pdf/chapter-12.pdf.
-5global supply chain bottlenecks and are generally thought to be less interest sensitive than
other sectors such as housing or durable goods. Production of these services is also
relatively labor intensive, and the labor market remains tight. Given the size of this
sector, some further progress here will be essential to restoring price stability. Over time,
restrictive monetary policy will help bring aggregate supply and demand back into better
balance, reducing inflationary pressures in this key sector.
The Outlook
Turning to the outlook, although further unwinding of pandemic-related
distortions should continue to put some downward pressure on inflation, restrictive
monetary policy will likely play an increasingly important role. Getting inflation
sustainably back down to 2 percent is expected to require a period of below-trend
economic growth as well as some softening in labor market conditions.
Economic growth
Restrictive monetary policy has tightened financial conditions, supporting the
expectation of below-trend growth.5 Since last year’s symposium, the two-year real yield
is up about 250 basis points, and longer-term real yields are higher as well—by nearly
150 basis points.6 Beyond changes in interest rates, bank lending standards have
tightened, and loan growth has slowed sharply.7 Such a tightening of broad financial
5
For an example of how tighter financial conditions affect economic activity, see the Federal Reserve
Board staff’s new index measuring U.S. financial conditions through their effect on the outlook for growth;
the index is discussed in Andrea Ajello, Michele Cavallo, Giovanni Favara, William B. Peterman, John W.
Schindler IV, and Nitish R. Sinha (2023), “A New Index to Measure U.S. Financial Conditions,” FEDS
Notes (Washington: Board of Governors of the Federal Reserve System, June 30),
https://doi.org/10.17016/2380-7172.3281.
6
Changes in real yields cited in this sentence refer to changes in yields on 2- and 10-year Treasury
Inflation-Protected Securities.
7
In addition, as the policy rate increased, nonbanking lending conditions changed as well. For example,
beginning in 2022 and continuing into the first half of this year, net issuance of riskier debt—such as
leveraged loans and speculative-grade and unrated corporate bonds—in public credit markets declined.
-6conditions typically contributes to a slowing in the growth of economic activity, and there
is evidence of that in this cycle as well. For example, growth in industrial production has
slowed, and the amount spent on residential investment has declined in each of the past
five quarters (figure 4).
But we are attentive to signs that the economy may not be cooling as expected.
So far this year, GDP (gross domestic product) growth has come in above expectations
and above its longer-run trend, and recent readings on consumer spending have been
especially robust. In addition, after decelerating sharply over the past 18 months, the
housing sector is showing signs of picking back up. Additional evidence of persistently
above-trend growth could put further progress on inflation at risk and could warrant
further tightening of monetary policy.
The labor market
The rebalancing of the labor market has continued over the past year but remains
incomplete. Labor supply has improved, driven by stronger participation among workers
aged 25 to 54 and by an increase in immigration back toward pre-pandemic levels.
Indeed, the labor force participation rate of women in their prime working years reached
an all-time high in June. Demand for labor has moderated as well. Job openings remain
high but are trending lower. Payroll job growth has slowed significantly. Total hours
worked has been flat over the past six months, and the average workweek has declined to
the lower end of its pre-pandemic range, reflecting a gradual normalization in labor
market conditions (figure 5).
This rebalancing has eased wage pressures. Wage growth across a range of
measures continues to slow, albeit gradually (figure 6). While nominal wage growth
-7must ultimately slow to a rate that is consistent with 2 percent inflation, what matters for
households is real wage growth. Even as nominal wage growth has slowed, real wage
growth has been increasing as inflation has fallen.
We expect this labor market rebalancing to continue. Evidence that the tightness
in the labor market is no longer easing could also call for a monetary policy response.
Uncertainty and Risk Management along the Path Forward
Two percent is and will remain our inflation target. We are committed to
achieving and sustaining a stance of monetary policy that is sufficiently restrictive to
bring inflation down to that level over time. It is challenging, of course, to know in real
time when such a stance has been achieved. There are some challenges that are common
to all tightening cycles. For example, real interest rates are now positive and well above
mainstream estimates of the neutral policy rate. We see the current stance of policy as
restrictive, putting downward pressure on economic activity, hiring, and inflation. But
we cannot identify with certainty the neutral rate of interest, and thus there is always
uncertainty about the precise level of monetary policy restraint.
That assessment is further complicated by uncertainty about the duration of the
lags with which monetary tightening affects economic activity and especially inflation.
Since the symposium a year ago, the Committee has raised the policy rate by 300 basis
points, including 100 basis points over the past seven months. And we have substantially
reduced the size of our securities holdings. The wide range of estimates of these lags
suggests that there may be significant further drag in the pipeline.
Beyond these traditional sources of policy uncertainty, the supply and demand
dislocations unique to this cycle raise further complications through their effects on
-8inflation and labor market dynamics. For example, so far, job openings have declined
substantially without increasing unemployment—a highly welcome but historically
unusual result that appears to reflect large excess demand for labor. In addition, there is
evidence that inflation has become more responsive to labor market tightness than was
the case in recent decades.8 These changing dynamics may or may not persist, and this
uncertainty underscores the need for agile policymaking.
These uncertainties, both old and new, complicate our task of balancing the risk
of tightening monetary policy too much against the risk of tightening too little. Doing too
little could allow above-target inflation to become entrenched and ultimately require
monetary policy to wring more persistent inflation from the economy at a high cost to
employment. Doing too much could also do unnecessary harm to the economy.
Conclusion
As is often the case, we are navigating by the stars under cloudy skies. In such
circumstances, risk-management considerations are critical. At upcoming meetings, we
will assess our progress based on the totality of the data and the evolving outlook and
risks. Based on this assessment, we will proceed carefully as we decide whether to
tighten further or, instead, to hold the policy rate constant and await further data.
8
The relationship between labor market slack and inflation, often called the Phillips curve relationship, is
likely nonlinear, steepening in a tight labor market. If the Phillips curve has steepened in this way, a small
change in labor market tightness could result in a more substantial change in inflation. It is difficult to
know with precision how steep that relationship is in real time or how it might evolve as labor market
tightness changes. For more information on nonlinearities in this relationship, see Christoph E. Boehm and
Nitya Pandalai-Nayar (2022), “Convex Supply Curves,” American Economic Review, vol. 112 (December),
pp. 3941–69; Pierpaolo Benigno and Gauti B. Eggertsson (2023), “It’s Baaack: The Surge in Inflation in
the 2020s and the Return of the Non-Linear Phillips Curve,” NBER Working Paper Series 31197
(Cambridge, Mass.: National Bureau of Economic Research, April),
https://www.nber.org/system/files/working_papers/w31197/w31197.pdf; and Nicolas Petrosky-Nadeau, Lu
Zhang, and Lars-Alexander Kuehn (2018), “Endogenous Disasters,” American Economic Review, vol. 108
(August), pp. 2212–45.
-9Restoring price stability is essential to achieving both sides of our dual mandate. We will
need price stability to achieve a sustained period of strong labor market conditions that
benefit all.
We will keep at it until the job is done.
@FedFRASER