Powell has a chance to reset market expectations in Jackson Hole
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Federal Reserve Chairman Jerome Powell will have the opportunity, if he wants to take it, to reset expectations in financial markets when central bankers meet this week for their annual Jackson Hole retreat.
Powell speaks on the economic outlook at 10 a.m. Washington time on Friday and is expected to reaffirm the Fed’s determination to keep raising interest rates to control inflation, although he probably stops short of saying how important officials when they meet. next month.
“That is the biggest question of all: how much will Powell micromanage financial conditions? We’ve reached a point where the economy is showing signs of slowing down,” said Laura Rosner-Warburton, senior US economist at MacroPolicy Perspectives in New York. “If we don’t see a further slowdown in the data and things bounce instead, then the Fed is going to have to manage financial conditions more actively.”
Powell’s speech will mark the climax of the two-day conference in the Grand Teton mountains of Wyoming. The prestigious event, which has in the past been used by Fed chairmen as a venue to make key policy announcements, brings together top policymakers from around the world.
Isabel Schnabel, a member of the Executive Board of the European Central Bank, speaks at a panel on Saturday. Bank of England Governor Andrew Bailey will be among those present, but ECB President Christine Lagarde does not plan to attend.
US stocks have risen since the Fed’s last policy meeting in late July amid growing expectations that the central bank will start to slow the pace of tightening, as well as signs that inflation pressures may be moderating.
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Most investors have been unfazed by strident claims from policymakers down the road that their fight against inflation is far from over, though the president himself has yet to speak since his post-government meeting press conference. July 27th.
This year’s conference will be held in person for the first time since 2019. Last year, it moved to a virtual format just days before the delta variant of Covid-19 spread across the country. By then, inflation had risen well above the Fed’s 2% target, but in his speech to the forum, Powell stressed that such pressures would likely prove transitory and did not appear widespread.
Now, a year later, inflation is near the highest levels in four decades and Powell has admitted that the Fed’s analysis was wrong and that policymakers should have started raising interest rates sooner.
Given that backdrop, even though the latest monthly consumer price report sparks some optimism that inflation may have peaked, Powell will likely hold his own, said Kevin Cummins, chief US economist at NatWest. Markets in Stamford, Conn.
“They’re so focused on doing this in part just because they screwed up last year with the whole ‘transitional’ thing, and they realize the only thing they can do now is tighten policy, and that will bring down inflation,” Cummins said. .
The Fed raised its benchmark interest rate by three-quarters of a percentage point at its July policy meeting, after a hike of the same size the previous month. The back-to-back moves marked the fastest pace of adjustment since the early 1980s.
At the moment, investors see similar odds of a half-point or another three-quarter point hike at the Fed meeting on September 20-21. August figures on jobs and consumer prices are due out from the Labor Department before then, and will likely be the determining factor in which option Fed officials choose.
In Europe, policymakers are having a similar debate about how big the next rate hike should be. The ECB trails its peers in responding to record inflation and only started raising rates in July. Following last month’s half-point increase, many policymakers have yet to indicate whether they lean toward another such step in September or a smaller quarter-point move as recession risks mount.
As the only Executive Board member present at this week’s conference, Schnabel will speak from a position of authority. His comments during a panel on the “post-pandemic policy outlook” may shed light on how the ECB plans to juggle near-term challenges, such as stubbornly high price pressures and a weakening economy, with long-term including climate change.
Beyond the short term, the big question is how high the Fed and its counterparts around the world will eventually push interest rates.
Kansas City Fed President Esther George, whose bank hosts the annual Jackson Hole symposium, said Thursday that whether policymakers opt for another big hike next month or start winding down changes toward for smaller ones, they may have to keep raising rates for a while, until they are “completely convinced” that inflation is headed lower.
“How far do rates go? I don’t think we know. We won’t know until we start to see how some of these variables come together, how the supply and demand pieces play out, to know exactly where that stopping point is,” George said. “But I think as you’ve heard others say, we’re going to have to be very clear that we’re going to have to be completely convinced that that number is going down.”
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