Written by Howard Schneider
JACKSON HALL, Wyoming (Reuters) – Inflation has eased. The unemployment rate is low at 3.5%. The US economy has managed to avoid a banking crisis that threatens the financial markets, and the financial markets have not only adhered to the Fed’s hard credit policies, but have also helped the process more recently by raising market interest rates.
When Federal Reserve Chairman Jerome Powell delivers a keynote address at a central bank research symposium hosted by the Federal Reserve Bank of Kansas City here on Friday, that tense backdrop may inspire a message that was formed mostly to avoid trouble.
With no clear crisis to deal with and public expectations to be reconfigured, why risk corrupting the party?
Until last year, Antolio Bomvim said, “If he had one sticky note on the palm of his hand, I think it would be ‘don’t rock the boat’, in the sense of not sounding too pessimistic or too puritanical.” He is a senior policy advisor to the Federal Reserve Bank and is now the Global Head of Macroeconomics for the Global Fixed Income Team at Northern Trust. “Market rates seem to be in a relatively good position… It’s hard to give advance guidance in the current context so he shies away from that.”
Powell is scheduled to speak at 10:05 AM EST (1405 GMT) as the keynote speaker at a research conference that will feature top global central bankers, economists and policymakers examining how the global economy has changed in the wake of the COVID-19 pandemic, the outbreak of inflation. , and other events.
The topic of his speech was included under the heading “economic prospects” in the central bank’s public calendar, but Fed chiefs were given wide latitude in how the Jackson Hole platform was used and the global attention it received. Powell’s five previous speeches here have ranged from a somewhat theoretical exercise outlining his approach as president, to a terse lecture last year on the “pain” needed to squeeze inflation out of the economy, a blunt message that turns expectations into financial markets that have questioned his conviction.
This time around, analysts and former Fed officials who helped craft the policy messages say he will likely repeat key ideas from recent central bank meetings and statements — particularly data showing weak inflation is welcome but the job is far from done; that decisions regarding further price increases will depend on the flow of data and will be taken on a meeting-by-meeting basis; Risks to the economy are becoming more “double” but the Fed’s priority remains ensuring that inflation is contained.
Moreover, he could start outlining how he thinks about the next phase of the Fed’s policy discussions – that is, how long it will take to keep interest rates at the current high level – or stick to the theme of the conference and put forward his views on issues such as the nature of inflation, etc. That might allow “slowing inflation” to continue, or whether the interest rate structure changed.
There is no perfect speech
Powell and other Fed officials view the US experience of the 1970s and 1980s as formative and, when it comes to a short-term policy view, do not want to repeat the mistakes they feel were made in those years and fail to guarantee full inflation. It includes.
“There is no perfect rhetoric at this point,” said Adam Posen, a former member of the Bank of England’s Monetary Policy Committee, with much uncertainty over the path of the economy and inflation and an emerging divide among policymakers over the immediate next steps. And now president of the Peterson Institute for International Economics. “I think Powell’s main effort is going to explain to what degree you want to keep (interest rates) higher for a longer period of time at current expectations.”
Investors in contracts linked to the Fed’s benchmark interest rate currently expect the Fed to start cutting interest rates next year from the current level set between 5.25% and 5.5%. As of June, policymakers still expect interest rates to rise in the future, with another quarter-point increase this year.
But although inflation by major measures is still more than double the Fed’s 2% target, it is down significantly from a year ago. Indeed, Fed officials have begun discussing the possibility of lower interest rates in the future, at least in the context of steadily declining inflation. If inflation declines as expected, Fed officials, including Powell, have indicated that rate cuts may be appropriate to maintain a roughly constant inflation-adjusted “real rate.”
Determining what the Fed will consider on this front — how long it will stay on interest rates at the current level and what might shape the decision to start cutting them — would speak to the next phase of the Fed’s policy discussion and address an issue that would affect the global economy. important to central banks around the world.
“He can’t provide forward guidance in any meaningful way right now,” said William English, former head of monetary affairs at the Fed and now a professor at the Yale School of Management. “But he can talk about how they are going to make their decisions as the economy develops over the next six months to a year.”
There are also underlying issues that Powell can address, topics that may seem abstract or irrelevant in the short term, but that could be important over time.
And at a moment when so much is at stake, from the direction of globalization to the structure of interest rates and the economic impact of demographic changes, “he can take a step back… and not address the current situation, but whether there have been structural changes.” It would make interest rates higher, increase inflation pressures, or allow for lower unemployment rates than in the past, said former Fed Vice Chairman Donald Kuhn, now a senior fellow at the Washington-based think tank Brookings Institution. “That would be interesting.”
(Reporting by Howard Schneider; Editing by Andrea Ricci)