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that all right um good morning um thank you and um welcome to the first day of sessions for the Federal Reserve Bank of Kansas City Jackson Hall economic Symposium my name is um Karen Dinan and I'm going to be your moderator for today's sessions um as as you heard last night from Jeff the topic for the Symposium uh is reassessing the effectiveness in transmission of monetary policy so uh it's a super important topic particularly right now and um we've got some great papers lined up for this morning we've got two papers and we also have

a panel lined up for that um but before we get to any of that I am um delighted to say that we have Federal Reserve chair uh J pal here to deliver um opening remarks so um with that let me welcome uh J pal to the podium thank you Karen and thanks to our host from the Kansas City fed it's it's great to be back here today uh four and a half years after Co 19's arrival the worst of the pandemic related economic distortions are fading inflation has declined significantly the labor market is no longer

overheated and conditions are now less tight than those that prevailed before the pandemic Supply constraints have normalized and the balance of risks to our two mandates has changed our objective has been to restore price stability while maintaining a strong labor market avoiding the sharp increases in unemployment that characterized earlier disinflationary episodes when inflation expectations were less well anchored while the task is not complete we have made a good deal of progress toward that outcome today I will Begin by addressing the current economic situation and the path ahead for monetary policy I will then turn to

a discussion of 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 so let's begin with the current situation and the near near-term outlook for policy for much of the past three years inflation ran well above our 2 % goal and labor market conditions were extremely tight the fomc's primary focus has been on bringing down inflation and appropriately so prior to this episode most Americans alive today had not experienced the pain of high inflation for a sustained

period inflation brought substantial substantial hardship especially for those least able to meet the higher costs of Essentials like food housing and transportation High inflation triggered stress and a sense of unfairness that linger today our restrictive monetary policy helped restore balance between aggregate supply and demand easing inflationary pressures and ensuring that inflation expectations remained well anchored inflation is now much closer to our objective with prices having risen 2.5% over the past 12 months after a pause earlier this year progress toward our 2% objective has resumed my confidence has grown that inflation is on a sustainable path

back to 2% turning to employment in the Years just prior to the pandemic we saw the significant benefits to society that can come from a long period of strong labor market conditions low unemployment High participation historically low racial employment gaps and with inflation low and stable healthy real wage gains that were increasingly concentrated among those with lower incomes today the labor market has cooled considerably from its formerly overheated State the unemployment rate began to rise over a year ago and is now at 4.3% still low by historical standards but almost a full percentage point above

its level in early 2023 most of that increase has come over the past 6 months so far Rising unemployment has not been the result of elevated layoffs as is typically the case in an economic downturn rather the increase mainly reflects a substantial increase in the supply of workers and a slow down from the previously frantic pace of hiring even so the cooling in labor market conditions is unmistakable job gains remain solid but have slowed this year job vacancies have fallen and the ratio of vacancies to unemployment has returned to its pre-pandemic range the hiring and

quits rates are now below the levels that prevailed in 2018 and 19 nominal wage gains have moderated and all told labor market conditions are now less tight than just before the pandemic in 2019 a year when inflation ran below 2% it seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon we do not seek or welcome further Cooling in labor market conditions overall all the continue the economy continues to grow at a solid Pace but the inflation and labor market data show an evolving situation the upside risks to inflation

have diminished and the downside risks to employment have increased as we highlighted in our last fomc statement we 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 we will do everything we can to support a strong labor market as we make further progress toward price stability with an appropriate dialing back of policy restraint there is good reason to think

that the economy will get back to 2% inflation while maintaining a strong labor market the current level of our policy rate gives us ample room to respond to any risks we may face including the risk of unw welcome further weakening in labor market conditions so let's now turn to the questions of why inflation Rose and why it has fallen so significantly even as unemployment has remained low there's a growing body of research on these questions including G ederson's work which we'll shortly discuss uh and this is a good time for this discussion it is of

course too soon to make definitive assessments this period will be analyzed and debated long after we are all gone the arrival of the covid-19 pandemic LED quickly to shutdowns in economies around the world it was a time of radical uncertainty and severe downside risks as so often happens in times of Crisis Americans adapted and innovated governments responded with extraordinary force especially in the United States Congress unanimously passed the cares act at the FED we used our powers to an unprecedented extent to stabilize the financial system and help Stave off an economic depression after a historically

deep but brief recession in mid 2020 the economy began to grow again and as the risks of a severe extended downturn receded and as the economy reopened we faced the risk of replaying the painfully slow recovery that followed the global financial crisis Congress delivered substantial additional fiscal support in late 2020 and again in early 2021 spending recovered strongly in the first half of 2021 and the ongoing pandemic shaped the pattern of the recovery lingering concerns over covid weighed on spending on in-person services but pent up demand stimulative policies pandemic changes in work and Leisure practices

and the additional savings associated with constrained Services spending all contributed to a historic surge in consumer spending on Goods the pandemic also wreaked havoc on Supply conditions 8 million people left the workforce at its onset and the size of the labor force was still 4 million below its pre-pandemic level in early 2021 the labor force would not return to its pre-pandemic Trend until mid 2023 Supply chains were snarled by a combination of lost workers disrupted International Trade linkages and tectonic shifts in the composition and level of demand clearly this was nothing like the slow recovery

after the global financial crisis enter inflation after running below Target through 2020 inflation spiked in March and April 2021 the initial burst of inflation was concentrated rather than broad-based with extremely large price increases for goods and short supply such as Motor Vehicles my colleagues and I judged at the outset that these pandemic related factors would not not be persistent and thus that the sudden rise in inflation was likely to pass through fairly quickly without the need for a monetary policy response in short that the inflation would be transitory standard thinking has long been that as

long as inflation expectations remain well anchored it can be appropriate for central banks to look through a temporary rise in inflation The Good Ship transitory was a crowded one with most mainstream analysts and advanced economy Central Bankers on board I think I see some for former Shipmates out there today the common expectation was that Supply conditions would improve reasonably quickly that the rapid recovery in demand would run its course and that demand would rotate back from Goods to Services bringing inflation down for a Time the data were consistent with the transitory hypothesis monthly readings for

core inflation declined every month from April through September 2021 although progress came slower than expected the case began to weaken around midyear as was reflected in our Communications and beginning in October the data turned hard against the transitory hypothesis inflation Rose and broadened out from Goods to services and it became clear that high inflation was not transitory and that it would require a strong response if inflation expectations were to remain well anchored we recognized that and pivoted beginning in November Financial conditions began to tighten uh and after phasing out our asset purchases we lifted off

in March of 20 2022 by early 2022 headline inflation exceeded 6% and core was above 5% new Supply shocks appeared Russia's invasion of Ukraine led to a sharp increase in energy and commodity prices the improvements in Supply conditions and the rotation in demand from Goods to Services were taking much longer than expected in part due to further covid waves in the United States and Co continued to disrupt production globally in including through new and extended lockdowns in China higher rates of inflation were a global phenomenon reflecting common experiences rapid increases in the demand for goods

strained Supply chains tight labor markets and sharp hikes in commodity prices the global nature of inflation was unlike any period since the 1970s back then High inflation became entrenched an outcome we were utterly committed to avoiding by mid 2022 the labor market was extremely tight with employment increasing by 6 and a half million jobs from the middle of 2021 this increase in labor demand was met in part by workers rejoining the labor force as health concerns began to fade but labor Supply remained constrained and in the summer of 2022 labor force participation remained well below

pre-pandemic level there were nearly twice as many job openings as unemployed persons from March 2022 through the end of the year signaling a severe labor shortage and inflation peaked at 7.1% in June 2022 at this Podium two years ago I discussed the possibility that addressing inflation could bring some pain in the form of higher unemployment and slower growth some argued that getting inflation under control would require a recession and a lengthy period of high unemployment and I expressed our unconditional commitment to fully restoring price stability and to keeping at it until the job is done

the fomc did not flinch from carrying out our responsibilities and our actions forcefully demonstrated our commitment to restoring price stability we raised our policy rate by 425 basis points in 2022 and another 100 basis points in 2023 and we've held our policy rate at its current restricted level restrictive level since July 2023 the summer of 2022 proved to be the peak of inflation the 4 and a half percentage Point decline in inflation from its peak two years ago has occurred in a context of low unemployment a welcome and historically unusual result so how did inflation

fall without a sharp rise in unemployment above its estimated natural rate pandemic related distortions to supply and demand as well as severe shocks to energy and commodity markets were important driver 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 our 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 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 a word on the critical importance of inflation expectations standard economic models have long reflected The View that inflation will return to its objective when product and labor markets are balanced without the need for economic slack so long as inflation expectations are anchored at our objective that's what the model said but the stability

of longer run inflation expectations since the 2000s had not been tested by a persistent burst of high inflation it was far from assured that the inflation anchor would hold concerns over de anchoring contributed to the view that disinflation would require slack in the economy and specifically in the labor market an important takeaway from recent experience is that anchored inflation EXP expectations reinforced by vigorous Central Bank actions can facilitate this inflation without the need for slack this narrative attributes much of the increase in inflation to an extraordinary collision between overheated and temporarily distorted demand and constrain

Supply while researchers differ in their approaches and to some extent in their conclusions a consensus seems to be emerging which I see as attributing most of the rise in inflation to this Collision all told the healing from pandemic distortions our efforts to moderate aggregate demand and the anchoring of expectations have worked together to put inflation on what increasingly appears to be a sustainable path to our 2% objective 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 over time

that confidence has been built over decades and reinforced by our actions that is my assessment of events your mileage May differ so let me wrap up by emphasizing that the pandemic economy has proved to be unlike any other and that there remains much to be learned from this extraordinary period our statement on longer run goals and monetary policy strategy emphasizes our commitment to reviewing our principles and making appropriate adjustments through a thorough public review every 5 years as we begin in this 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 clearly evident during the pandemic demand humility and a questioning Spirit focused on learning lessons from the past and applying them flexibly to our current challenges thank you