Fed Chair Powell’s message in Jackson Hole: Two means two

Federal Reserve chair Jerome Powell delivered a seemingly simple message in Jackson Hole in August—that he and his colleagues on the Federal Open Market Committee (FOMC) will do what it takes to get US inflation down to 2 percent. Nestled in that headline message, however, were two important components: first, a welcome rebuttal to the recent chatter from some economists that maybe the target should be adjusted upward and, second, a reiteration of his resolve to finish the job on inflation, even if that means putting the country through a recession.

A strong case can be made for raising the target to 3 percent, but only after the 2 percent goal has already been reached. Credibility is everything in the world of central banking, and this ordering—for better or for worse—is what’s required to reassure markets of the Fed’s resolve. Also, the FOMC should raise the target only in the context of its next broad “framework review” in 2025.

The “chatter” about letting the target slip higher has come from some serious experts. For example, Jason Furman suggested the target become a range from 2 to 3 percent. Paul Krugman seemed happier with a new point target of 3 percent. Nick Timiraos quoted Rep. Ro Khanna (D-CA) in the Wall Street Journal as saying a 2 percent target “is not a science. It’s a political judgment they have to make. I don’t see why having a particular number as the Holy Grail…is the right way to get that judgment.”

Why revisit the level of the target? Analysts worry that although inflation has come down substantially, it may get “stuck” at 2½ or 3 percent, and the cost of forcing it the rest of the way down to the current target would be too high in terms of added unemployment and lost output. Moreover, 2 percent may simply be the wrong target now in light of evidence suggesting the “neutral” policy rate is lower than FOMC participants believed it was when they set the inflation target at 2 percent in 2012.[1]

Powell has made no secret of his skepticism regarding the wisdom of moving the target up. For example, when the Fed launched its first-ever “framework review” in 2019, the question as to whether the inflation target should be reassessed was taken off the table from the start. (See, for example, this speech by then-vice chair Richard Clarida, who was deputized by Powell to run the framework review process.) And during his December 14, 2022 press conference, when Powell was asked “…is there ever a point where you actually reevaluate that target and maybe increase your inflation target…?” he responded: “The Committee—we’re not considering that. We’re not going to consider that under any circumstances. We’re going to keep our inflation target at 2 percent.”

If anyone thought the recent groundswell might have revived interest in the Committee in revisiting the topic, Powell buried the notion in Jackson Hole, and he was right to do so. As mentioned, the target should ultimately be raised to 3 percent, but only on two preconditions:

• First, the FOMC should finish the job of getting inflation down to 2 percent before raising the target. Otherwise, financial market participants will doubt the Committee’s commitment to achieving the target the nexttime inflation becomes inconveniently high.
• Second, the FOMC should raise the target in the context of a framework review. These reviews have become the forum in which foundational issues can be revisited; voluminous staff research can be commissioned and disseminated; and extensive consultation (including with oversight committees in the Congress) can be undertaken.

Raising the target between framework reviews would call into question the value of the review process and would leave Fed watchers confused about whether they can trust the policymaking committee to be true to its word. For now, Powell’s message was simple and direct: Two means two.

The second key message in Powell’s speech was that he and his colleagues are willing to raise rates further—even to the point of putting the US economy through a recession—if that is what’s needed to bring inflation down to the 2 percent objective. He put the point gently, but it was unmistakable: Finishing the job on inflation “is expected to require a period of below-trend economic growth as well as some softening in labor market conditions” (emphasis added). And later on: “We are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive to bring inflation down to [2 percent] over time” (emphasis added).

Missing from the speech was any quantification of how big an increase in the unemployment rate might be required to get the inflation job done. Nobody knows the answer to that. The fact that inflation has come down as much as it has without any increase in unemployment has caught many analysts by surprise, so Powell was right not to put a number on it. He was making a larger point: He and his colleagues will do what is necessary—whatever that turns out to be. He didn’t commit to taking more aggressive action but pointedly left the door open to doing so if inflation proves less compliant than he currently expects.

Perhaps most significant of all, he closed the speech with this simple declaration: “We will keep at it [the task of restoring price stability] until the job is done.” The wording is clear enough taken at face value; but there is a deeper historical meaning. By using this specific wording, Powell was wrapping himself in the mantle of Paul Volcker, widely regarded as the patron saint of central banking in the United States for his success in quelling the biggest burst of inflation in the modern era. Powell is surely aware that Volcker’s memoire—coauthored with Christine Harper—was titled Keeping At It: The Quest for Sound Money and Good Government. By aligning himself so unmistakably with Volcker, Powell is staking his own personal integrity on winning the battle against today’s inflation, no matter the cost.

Again, the message is clear: Two means two. Full stop.

Note

1. At the January 2012 FOMC meeting, when the 2 percent target was unveiled, the median FOMC participant estimated that the inflation-adjusted federal funds rate that would prevail in the long run would be 2.2 percent. (See Table 2 in https://www.federalreserve.gov/monetarypolicy/files/FOMC20120125SEPcompilation.htm.) In June 2023, the median participant put that estimate at 0.5 percent. (See Table 1 in https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20230614.pdf.) It’s too simplistic to suggest that if the neutral rate has shifted down 1.7 percentage points, the inflation target should be moved up by that same amount, but the logic is directionally correct.