U.S. Federal Reserve Chair Jerome Powell has issued a warning about the future of the American economy.
While delivering opening remarks at the Second Thomas Laubach Research Conference in Washington DC, Powell noted that “longer-term inflation expectations” have driven up real interest rates, which are interest rates adjusted for inflation.
The Fed chair also says those rates could be a sign of things to come.
“Higher real rates may also reflect the possibility that inflation could be more volatile going forward than in the inter-crisis period of the 2010s. We may be entering a period of more frequent, and potentially more persistent, supply shocks — a difficult challenge for the economy and for central banks.
While our policy rate is currently well above the lower bound, in recent decades we have cut the rate by about 500 basis points when the economy is in recession. Although getting stuck at the lower bound is no longer the base case, it is only prudent that the framework continue to address that risk.”
Supply shocks are unforeseen events that rapidly alter the supply of a good or commodity.
Evidence suggests supply shocks were the most important factor driving inflation between 2021-2023, says Joseph E. Gagnon, an international macroeconomist at the Peterson Institute for International Economics.
Last week, the Federal Open Market Committee (FOMC) announced that it planned to maintain the target range for the federal funds rate at 4.25-4.5%, arguing that it was the most suitable level to achieve both maximum employment and controlled inflation. The Fed has held interest rates steady since December, when it cut the rate by 0.25%.
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