Federal Reserve Chair Jerome Powell has made inflation a central theme in his speeches, testimonies, and reports over the past few years. This Wednesday, the Fed is expected to implement a 25-basis-point reduction to its benchmark interest rate, a move that could significantly impact borrowing costs for mortgages, credit cards, and car loans. This anticipated rate cut marks a turning point for the Fed, which has kept interest rates at a two-decade high for over a year in an effort to combat inflation. As inflation has fallen close to pre-pandemic levels, the Fed is now shifting gears towards a more accommodative monetary policy.
Powell’s statements on inflation have been closely watched by economists, investors, and policymakers alike. He frequently addresses the topic at major public appearances, including his semiannual report to Congress and the Jackson Hole symposium, as well as in regular press conferences following Federal Open Market Committee (FOMC) meetings. Over the past year, Powell has addressed inflation-related topics in nearly every major policy address, providing regular updates to the Senate and House committees, delivering speeches to international forums, and holding press briefings.
To understand the Fed’s evolving approach to inflation, it’s helpful to look at some of Powell’s key statements, which offer a glimpse into the journey so far. Recall that inflation peaked in mid-2022 at 9.1%, the highest rate in four decades. Since then, inflation has significantly cooled, reaching 2.5% last month. In his speech at last month’s Jackson Hole Economic Symposium, Powell signaled that the Fed believes inflation is finally moving closer to its long-term target, stating, “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.”
Throughout his public pronouncements, Powell has acknowledged the widespread economic and social difficulties caused by high inflation, highlighting the Fed’s efforts to alleviate the pressures. He stated, “Inflation brought substantial hardship, especially for those least able to meet the higher costs of essentials like food, housing, and transportation.” Powell also emphasized that the Fed’s focus on controlling inflation has been effective without causing a dramatic rise in unemployment, saying, “While the task is not complete, we have made a good deal of progress toward restoring price stability while maintaining a strong labor market.”
In June 2024, Powell recognized that while inflation had eased substantially, it was still too high, saying, “The labor market has come into better balance, with continued strong job gains and a low unemployment rate. Inflation has eased substantially from a peak of 7% to 2.7% but is still too high.” This statement highlighted the Fed’s dual mandate of controlling inflation and maintaining employment, a balancing act that requires careful consideration of economic data and potential risks.
Throughout 2023, Powell continued to emphasize the Fed’s commitment to bringing inflation back down to its 2% goal, but also acknowledged the need to carefully manage the impact of higher interest rates on the economy. He likened the Fed’s current strategy to “navigating by the stars under cloudy skies,” suggesting that the Fed is adjusting its policies based on incomplete data and a complex economic landscape. He also emphasized the connection between wage growth and inflation, stating, “Wages are moving in the right direction, but inflation is still running too hot to declare victory.” This statement hinted that while progress had been made, the Fed’s work was far from over.
Looking back further, Powell’s statements reveal a clear shift in the Fed’s stance on inflation. In November 2022, Powell cautioned against prematurely loosening policy, stating, “History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.” At that time, the Fed was focused on aggressively raising rates to control inflation, even amidst signs of a potential slowdown in economic growth.
In March 2022, Powell acknowledged that inflation was taking longer to return to the Fed’s price stability goal than previously expected. He stated, “Inflation is likely to take longer to return to our price-stability goal than previously expected. The median inflation projection of FOMC participants is 4.3% this year and falls to 2.7% next year and 2.3% in 2024; this trajectory is notably higher than projected in December, and participants continue to see risks as weighted to the upside.” This statement underscored the Fed’s concerns about persistent inflationary pressures and the potential for further price increases.
The Fed’s decision to lower interest rates this week, driven by the significant progress in taming inflation, reflects a major shift in its approach to monetary policy. This move is likely to have a positive impact on the economy, potentially stimulating investment and consumer spending. It also reflects the Fed’s confidence in the economy’s resilience and its ability to navigate a complex economic landscape. As the Fed continues to monitor economic data and adjust its policies, it will be interesting to see how Powell’s messaging evolves in the coming months, offering further insights into the future trajectory of inflation and the broader economy.
