Fed's Powell Says Long-Term Inflation Expectations Well-Anchored

Summary

• Fed Chair Jerome Powell explains the framework for responding to energy price shocks (e.g., oil), which are supply shocks.
• States monetary policy tools primarily work on aggregate demand, not supply, and act with "long and variable lags."
• Argues the historical tendency is to "look through" transient supply shocks because by the time tighter policy impacts the economy, the shock may have passed, creating inappropriate economic drag.
• Emphasizes a critical condition for this approach: the central bank must "carefully monitor inflation expectations."
• Warns that repeated supply shocks can cause the public and businesses to adjust their long-term inflation expectations upward.
• Notes that in the current context, inflation has been coming down post-pandemic but has not yet stabilized at the 2% target.
• States that, for now, longer-term inflation expectations "appear to be well anchored."
• Indicates the Fed is not currently facing a decision on how to respond to the latest geopolitical-driven energy shock, as the economic effects are still unknown.
• Concludes that when a decision is necessary, the Fed will be "mindful of that broader context" of not having firmly reached 2% inflation.