Federal Reserve Chair Jerome Powell delivered a sobering message this week: the U.S. economy may be entering a period marked by more frequent and potentially lasting supply shocks that could lead to ongoing inflation volatility.
In a speech kicking off the central bank’s five-year policy framework review, Powell laid out the challenges facing the Fed in an increasingly unpredictable world economy, Reuters reported. “We may be entering a period of more frequent, and potentially more persistent, supply shocks,” he said. That scenario, he added, would be “a difficult challenge for the economy and for central banks.”
Powell’s remarks suggest that the Fed is recalibrating its view of what lies ahead, not just in terms of interest rate policy, but also in how it communicates with the public. He emphasized the importance of acknowledging uncertainty and improving transparency as inflation dynamics evolve.
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The U.S. central bank’s current benchmark rate remains well above zero, sitting in the 4.25% to 4.5% range. While Powell did not suggest imminent changes, he noted that in past downturns, the Fed has often slashed rates by five full percentage points to counter recessions, which is more challenging when starting from higher baselines.
In the past, the Fed has aimed to overshoot its 2% inflation target temporarily to balance out long periods of undershooting. But that approach fell out of favor after the post-pandemic inflation surge. Powell said policymakers are now rethinking that strategy in light of recent events.
The takeaway: Americans may need to get used to a more volatile economy where inflation doesn’t always behave and central bank policies must adapt on the fly. As Powell noted, effective communication and realistic expectations may be just as important as the interest rate itself.
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