Fed Chairman Jerome Powell said that the time has come for policy to adjust the direction of travel it is clear that the timing and pace of rate cuts will depend on incoming data the evolving outlook and the balance of risks.
Jerome Powell began addressing the current economic system and the path ahead for monetary policy including the indication that we are close to rate cuts. Also discussed economic events since the pandemic arrived exploring why inflation rose to levels not seen in a generation and why it has fallen so much while unemployment has remained low.
Current Economic System and Path Ahead for Monetary Policy Highlights
- The FOMC’s primary focus has been on bringing down inflation.
- Currently, the Restrictive Monetary Policy helped restore the balance between aggregate supply and demand easing inflationary pressures and ensuring inflation expectations remained well-anchored.
- The main objective is to bring inflation to 2% with a strong labor market.
- Nominal wages have moderated and labor market conditions are now less tight than just before the pandemic in 2019.
- As they highlighted in the last FOMC statement they are attentive to the risks to both sides of our dual mandate “The time has come for policy to adjust the direction of travel is clear and the timing and pace of rate Cuts will depend on incoming data the evolving outlook and the balance of risks”.
- And stated they would do everything to support a strong labor market to make further progress toward price stability with an appropriate dialing back of policy restraint.
Why Inflation Rose and Why it Has Fallen So Significantly Even as Unemployment Has Remained Low?
- Energy and Commodity markets were important drivers of high inflation and their reversal has been a key part of the story of its decline, the unwinding of these factors took much longer than expected but ultimately played a large role in the subsequent disinflation.
- Raised the policy rate by 425 basis points in 2022 and another basis point in 2023 they held the policy rate at its current restrictive level since July 2023.
- Restrictive monetary policy contributed to a moderation in aggregate demand which combined with improvements in aggregate supply to reduce inflationary pressures while allowing growth to continue at a healthy pace.
- As labor demand also moderated the historically high level of vacancies relative to unemployment has normalized primarily through a decline in vacancies without sizable and disruptive layoffs bringing the labor market to a state where it is no longer a source of inflationary pressures.
- Standard economic models have long reflected the views that inflation will return to its objective when product and labor markets are balanced without the need for economic slack.
- Standard economic models have long reflected the views that inflation will return to its objective when product and labor markets are balanced without the need for economic slack.
- Disinflation while preserving labor market strength is only possible with anchored inflation expectations which reflect the public’s confidence that the central bank will bring about 2% inflation.
- Lastly, the statement on longer goal runs and monetary policy strategies emphasizes the commitment to reviewing the principles and making appropriate adjustments through a thorough public review every 5 years.
Read More: Starbucks Pumpkin Spice Latte Returns (2024).