"We need to act now, forthrightly and strong" to avoid the kind of inflation that became embedded in expectations in the 1970s, Federal Reserve Chair Jerome Powell said Thursday in a moderated conversation at the Cato Institute monetary policy conference.
"We are strongly committed to this project and we will keep at it until we get the job done," he added.
The inflation of the 1970s and early '80s "followed several failed attempts to bring inflation under control," and that led people to assume that high inflation was the norm, Powell explained. In other words, history has taught today's policymakers not to loosen policy too early.
"Today, demand continues to be very strong, he said. "What we hope to achieve is a period of growth below trend" that will bring labor market back into balance, Powell said. "The shock to the labor supply that we got from the pandemic was large and persistent." The increase in labor force participation that was seen in August's jobs report was welcome, but it's still a percentage point below prepandemic levels.
Update at 9:22 AM ET: There are different theories on what caused the recent high inflation, he said. "The relationship between money supply and inflation has been unstable" for years. He doesn't find money supply to be a good predictor of inflation. "Monetary aggregates don't play a key role" in the Fed's policy.
9:23 AM ET:When asked if it makes sense for the Fed's dual mandate to include full employment, Powell said the dual mandate has served the public well and that it's workable. "I don't see a case for the Fed to move to a single mandate," he said. Neither does he see the price stability-full employment mandate as conflicting with each other.
He further said he wouldn't want the Federal Reserve's mandate to be broadened or narrowed." Keeping its mission narrow helps it to operate as a politically independent institution, he added.
Powell doesn't see the Fed changing to a "scarce reserves" regime, saying it would be impractical. Its current "ample reserves" system provides a lot of liquidity in the banking system, which is a net gain.
The central bank hasn't made any decisions on creating a central bank digital currency and it will take some time to evaluate. Proceeding with a CBDC would require support from the executive and legislative branches of government, he said. Privacy protection and identity verification would be critical factors.
Unbacked cryptocurrencies are a speculative asset that aren't a "great store of value," Powell said. "Stablecoin is a different thing," he said. While the Fed doesn't want to stand in the way of innovation, "something that's purported to be money needs to be appropriately regulated," he said. "I think you need regulation."
Our federal fiscal policy is not on a sustainable path and it has been for some time," he said, urging that the sooner fiscal policy gets on a sustainable path the better.
Event ended at 9:51 AM ET.