BURSTFederal Reserve Chair Jerome Powell said Thursday that the economy may be entering a period of more volatile inflation and more regular supply shocks relative to recent decades, in which inflation and unemployment remained low.
Powell reflected Wednesday on “the possibility that inflation could be more volatile going forward than during the inter-crisis period of the 2010s,” the decade between the global financial crisis of 2008 and the coronavirus pandemic, which started in March 2020.
“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,” Powell said at a conference reviewing U.S. central bank policy of recent years.
Powell didn’t get into the specifics of what may be driving the increased frequency of the supply shocks, which are external disruptions to economic activity such as spikes in upstream commodity prices or work stoppages like the ones that happened during the pandemic.
Powell said last year that the era of near-zero interest rates is likely over.
“We probably won’t go back to that era between the global financial crisis and the pandemic where rates were very, very low and inflation was very low — like, extremely low,” Powell told Congress last summer. “I don’t think we’re going back to rates that are that low.”
However, Powell has recently stressed significant policy changes being undertaken by the Trump administration in the areas of immigration, trade, regulation, and federal spending and taxation.
Trump’s trade war has been the most noticeable of those in recent months, which saw the overall U.S. tariff rate rising to around 25 percent in April, largely due to triple-digit tariffs on China, a top U.S. trading partner.
The 145-percent tariff on China has since been lowered, and the effective U.S. tariff rate is now closer to 13 percent than 25 percent, according to Wall Street ratings agency Fitch.
But Trump’s trade war is in a constant state of flux and has been marked by several notable reversals, including on 25-percent tariffs on Mexico and Canada, on the “de minimis” tariff exemption on packages from China worth less than $800, and on dozens of country-specific “reciprocal” tariffs that involved a novel calculation from the White House.
Interbank lending rates are less likely now to get “stuck at the lower bound,” Powell said, as they did between 2008 and 2015 when the Fed kept them around 0 percent even as unemployment steadily declined over that period.
Powell on Thursday stressed that public expectations for inflation should remain low, a policy that the Fed hammered home during the last bout of high inflation that occurred in the 1970s and persisted through the period of more tempered business cycles and higher productivity growth in the 1990s.