Federal Reserve Chairman Jerome Powell’s remarks at the Jackson Hole meeting grabbed headlines two weeks ago. His message was clear: The Federal Reserve must persevere in bringing inflation under control even if the U.S. economy and labor market weaken. It disappointed investors who were hoping the Fed would pivot from tightening monetary policy, and the stock market has sold off in the meantime.
In his remarks, Powell acknowledged that the current high inflation is the result of strong demand and constrained supply, and that the Fed’s tools work principally on aggregate demand. But he maintained that, “None of this diminishes the Federal Reserve’s responsibility to carry out our assigned task of achieving price stability.”
Still, many observers question whether it is appropriate to tackle global supply shocks by raising interest rates significantly. In their view, the Fed could be making a policy error…
