Federal Reserve Chair Jerome Powell said Thursday that the US may be entering a period of more frequent supply shocks and volatile inflation, warranting more transparent communication practices from the central bank.
The comments came in a speech as Powell kicks off a five-year review of the central bank’s monetary policy framework.
“A critical question is how to foster a broader understanding of the uncertainty that the economy generally faces,” Powell said in his speech in Washington, D.C., predicting that “we may be entering a period of more frequent, and potentially more persistent, supply shocks.”
That, he said, will be a “difficult challenge for the economy and for central banks.”
He said higher interest rates adjusted for inflation may reflect the possibility that inflation could be more volatile going forward than in the intercrisis period of the 2010s.
“In periods with larger, more frequent, or more disparate shocks, effective communication requires that we convey the uncertainty that surrounds our understanding of the economy and the outlook. We will examine ways to improve along that dimension as we move forward.”
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He noted that while the Fed’s benchmark policy rate is currently well above zero — currently in the range of 4.25% to 4.5% — in recent decades, the Fed has cut the rate by about 500 basis points when the economy is in a recession.
Powell stressed the critical need to maintain inflation expectations at 2%, which has also been a hallmark of past assessments.
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The Fed is undertaking a review of its monetary policy framework, a practice it does every five years. In 2020, during the last review, the Fed was concerned about pushing away the risk of deflation.
At the time, the Fed said that following periods in which inflation has been running persistently below 2%, they would likely aim to achieve inflation moderately above 2% for some time.
After inflation took off following the pandemic, Powell acknowledged that the idea of an intentional, moderate overshoot proved irrelevant to their policy discussions and has remained so through today.
Powell noted that in discussions so far, Fed members have indicated that they thought it would be appropriate to reconsider the language around aiming to essentially “overshoot” the long-run inflation target at times so that the inflation rate is close or equal to the Fed’s goal of 2% on average to guard against falling short of the target.
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