🌄 Jackson Hole 2025: Central Bankers Confront the Labor Market Transition

🇺🇸 Powell’s Swan Song 🎤

Powell opened by highlighting the U.S. backdrop:

• Policy rates have sat at 5.25–5.5% for over a year.
• Inflation is easing but still sticky: PCE at 2.6%, core PCE at 2.9%.
• Payroll growth slowed sharply: ~35k/month in 2025 vs. 168k/month in 2024.
• Unemployment steady at 4.2%, GDP growth down to 1.2% in H1 2025.

The Fed also revised its framework, abandoning Average Inflation Targeting and the “shortfalls” language on employment, in favor of a return to flexible inflation targeting. Powell stressed that policy is “not preset” but may need to adjust soon.

Markets heard the dovish tone loud and clear:

• Equities rallied (S&P +1.5%).
• Treasuries strengthened, the dollar softened.
• CME FedWatch put the odds of a September 25bp cut at 91.3%.

While Bloomberg hosts reacted with surprise, Powell did not shock the room. His message was cautious and steady-handed — a fitting farewell as his tenure nears its close.

Notably, James Bullard, former St. Louis Fed President and a contender to succeed Powell, immediately called for 100bp of cuts by year-end, underscoring the live policy debate.

🇬🇧 Bailey’s UK Puzzle 🧩

Andrew Bailey focused on the UK’s productivity and participation woes.

• From 1990–2008, potential supply grew 2.6% per year.
• Since 2020, that figure slumped to just 0.7%.
• Drivers: ageing, poor health, and weak labor force participation.

The UK is unique among advanced peers in failing to restore participation post-pandemic. Health challenges — especially among men — weigh heavily, while women’s participation is more resilient. Remote work initially boosted supply but is now declining.

The message: without reversing participation declines, the UK faces long-term stagnation in supply capacity.

🇪🇺 Lagarde’s European Resilience 💪

Christine Lagarde struck a more optimistic tone. Her thesis: Europe has gone “beyond hysteresis.”

Historically, disinflation came at the cost of rising unemployment. This cycle, however, Europe defied expectations:

• Since 2021, employment grew 4.1%, almost matching GDP growth of 4.3%.
• Inflation fell sharply, but joblessness did not surge.

She identified three forces behind this resilience:

1. Delayed wage catch-up → real wages lagged inflation, making labor cheaper.
2. Fewer hours worked → labor hoarding and lifestyle shifts.
3. Expanding supply → more women, seniors, and migrants entering the workforce.

The flipside? Weak productivity. With fewer hours, ageing, and labor hoarding, output per worker is at risk. Migration helps, but demographics remain a headwind.

Lagarde cautioned that Europe may have avoided hysteresis but risks paying the price in lower productivity growth.

🇯🇵 Ueda’s Wage Revival 📈

Kazuo Ueda offered Japan’s perspective: a country where demographics have long been destiny.

• Working-age population peaked in 1995, total population in 2008.
• Participation gains (women at 78%, seniors above 25%) have cushioned the blow — but limits are now visible.
• For the first time in decades, wages are rising strongly: up 5.25% in 2025, the fastest in 34 years. Importantly, pay hikes are spreading beyond big corporations to SMEs.

Structural changes are also underway:

• Rising labor mobility as younger workers switch jobs more frequently.
• Labor shifting to higher-productivity firms.
• Firms investing heavily in automation and AI to counter shortages.

Ueda framed shortages not only as a cost but as a potential driver of efficiency — a silver lining for a shrinking workforce.

🌍 The Common Threads 🔗

Despite regional differences, Bailey, Lagarde, and Ueda highlighted shared challenges:

• Demographics: ageing populations strain labor markets across the globe.
• Participation: whether through health crises (UK), lifestyle changes (EU), or policy-driven inclusion (Japan), labor supply is in flux.
• Inflation dynamics: central banks still link strong labor markets to inflation risks, though structural shifts complicate that logic.

Powell’s U.S. story echoes these themes. Immigration curbs slowed labor force growth, paralleling Bailey’s and Ueda’s concerns. Like Europe, the U.S. is testing whether inflation can cool without deep job losses.

💡 Beyond the Labor Narrative

Mainstream (Keynesian + central banking) thinking holds:

• Worker shortages → firms raise wages.
• Higher wages → stronger demand.
• Stronger demand → higher prices.

This is the classic wage–price spiral.

But as critics remind us, inflation is ultimately a monetary phenomenon. Persistent price increases reflect monetary expansion — driven by central banks and the banking system — not simply by workers “asking too much.”

🧭 Final Takeaway

Jackson Hole 2025 underscored that labor markets are no longer a cyclical subplot — they are the structural core of today’s macro story.

• Powell: a careful farewell, markets betting on cuts.
• Bailey: a UK trapped in low supply growth.
• Lagarde: a Europe resilient in jobs but fragile in productivity.
• Ueda: a Japan turning shortages into innovation.

Together, these perspectives remind us: monetary policy now lives in the shadow of demographics, labor transitions and government interventionism.

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