The president of the European Central Bank, Christine Lagarde, warned this week that lowering high inflation will rely on tighter monetary policy. Speaking to central bankers gathered in Jackson Hole, Wyoming, Lagarde did not commit to a clear path, leaving open whether policy would tighten beyond the September meeting or hold steady. With the euro area’s key rate at 4.25 percent, a 15-year peak, two possibilities remained as July ended. The tone at the gathering, however, tempered earlier hopes that the rate cycle might ease soon. Some observers expect inflation to crest, while others fear further tightening will be needed to anchor prices.
Jerome Powell warns from Jackson Hole that the US economy may not have cooled enough
Against a backdrop of continued uncertainty, central banks must provide a stable anchor for the economy to maintain confidence. Prices move in response to policy signals, and the current environment argues for keeping restrictive rates for a longer period to ensure inflation returns to the target in the medium term. Powell reaffirmed that the 2 percent objective remains central, and policy will stay aligned with that goal unless circumstances shift. He acknowledged that some voices advocate a higher inflation target after the pandemic, but the Fed continues to view 2 percent as essential to expectations and credibility.
Powell highlighted that monetary policy itself introduces some uncertainty in a changing world. The path forward requires sticking to the plan while remaining flexible in light of new data. He stressed that inflation expectations must stay anchored even if temporary deviations occur, since the economy is susceptible to shocks. The long‑term aim remains clear: inflation at 2 percent, reached through steady, data‑driven actions over the medium horizon.
open and flexible
Lagarde urged a balance of openness and flexibility, arguing that a clear target helps steer policy while the stance stays adaptable to a complex economic and geopolitical backdrop. The COVID period, the invasion of Ukraine, and shifts in energy markets all influence decisions. The ECB intends to act from one meeting to the next, guided by three criteria: the inflation outlook, the pace of core inflation, and how strongly monetary policy is transmitted through the economy. This approach favors responsiveness over a fixed timetable, ensuring policy remains suitable as conditions evolve.
The third element Lagarde emphasized is humility. Maintaining public trust requires acknowledging current limits and the possibility of forecast errors. While stabilizing prices remains the goal, policymakers recognize the need to communicate uncertainties honestly and adjust expectations as new data arrive.
Recent euro area data show headline inflation easing from its October peak but staying elevated. The unemployment rate in the euro area sits at historically low levels, reflecting a mixed landscape of cooling prices alongside tight labor markets. These signals shape the discussion about when and how much to tighten next as economies pursue divergent paths.
insufficient cooling
At the Federal Reserve forum, Powell warned that the dollar‑denominated central bank is watching for signs that the U.S. economy might not cool as quickly as hoped. Rate increases could be needed to curb demand until inflation returns to the 2 percent target in the medium term. Yet the Fed also aims to stay prudent, keeping open the possibility of further tightening or pausing as data warrant. The policy range remains 5.25 to 5.5 percent, with careful attention to evolving conditions.
In the same Jackson Hole session, Powell reiterated the need to navigate with caution, guided by incoming data and shifting risks. The path ahead depends on a careful balance of inflation trends, growth data, and the strength of the labor market, with the Fed ready to adjust policy as new evidence arrives.
Jerome Powell warns from Jackson Hole that the US economy may not have cooled enough
Powell framed the policy discussion as a test of discipline amid uncertainty. The outlook requires assessing progress with data integrity and re‑evaluating risks as they unfold. At future meetings, the committee will weigh whether tighter policy is warranted or rates should hold steady while awaiting more information. The emphasis remains on preserving credibility and staying aligned with the 2 percent target over the medium term.
increased hardening
Powell noted that declines in core inflation in recent months have not yet proven persistent enough to declare victory. Economic growth, consumer spending, and housing activity show resilience, suggesting that inflation progress will be gradual. A sustained move toward the 2 percent target would likely require continued policy restraint and a careful assessment of the lagged effects of prior rate increases. The central bank will monitor inflation dynamics relative to the 2 percent goal and adjust policy accordingly.
While acknowledging the lag in policy transmission, Powell stressed that the Fed will stay vigilant to ensure inflation keeps moving downward. The central bank remains committed to the 2 percent objective, with decisions tailored to evolving conditions and the strength of the labor market. The overall stance aims to balance a credible path to price stability with support for ongoing economic expansion.