Jerome Powell and monetary policy

Below is a video from the Wall Street Journal that outlines the decision by Jerome Powell (Chairman of the US Central Bank – Federal Reserve) to reduce the US Federal Funds rate by 50 basis points (0.5%). If you are teaching monetary policy it explains the difficulty in deciding, in this case, how much to cut interest rates and why. To get inflation down from 9.1% in June 2022 there is going to be some negative impact on the economy – maybe a recession and higher levels of unemployment. Powell explains this by saying that ‘there is no painless way of restoring price stability’. There is a very fine line to maintaining high interest rates to reduce inflation but also impacting the level of unemployment. If monetary policy is too tight (high interest rates) for too long it could bring down inflation but at the expense of higher unemployment. The trick is to set interest rates at a level where inflation starts to ‘cool’ but with a limited impact on the level of unemployment. However, external factors that you have no control over might impact the inflation rate – e.g. Ukraine War. See mindmap on monetary policy.

The Federal Reserve reduced its benchmark interest rate for the first time since 2020, a key shift in its fight against inflation as concerns centre around the labour market. While prices have cooled, an uptick in unemployment has reignited warnings of a recession. Regardless of the Fed’s decision about rate cuts, a lot remains at stake for the economy and Fed Chair

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