Fed Watchers Scrutinize Jackson Hole for Hints on Interest-Rate Outlook
Federal Reserve officials returning to Grand Teton National Park for the Kansas City Fed’s annual economic symposium on Thursday face one of the most challenging economic backdrops since officials began hosting the event in Jackson Hole, Wyo., in 1982.
U.S. inflation is running close to a 40-year high, while unemployment is at half-century lows. Global economies are reeling from the effect of multiple shocks—the coronavirus pandemic, a massive fiscal and monetary policy response, and the fallout from Russia’s war in Ukraine. Central bankers could soon confront difficult trade-offs between bringing down inflation and preventing a large rise in unemployment.
The annual gathering—the first in-person one since 2019 after a pandemic-induced hiatus—has been a staging ground for high drama in the past. In 2008, officials grappled with a deepening financial crisis, and in 2014, then-European Central Bank President
Mario Draghi
laid the groundwork for a bond-buying campaign to stimulate the European economy.
Two years ago, during a virtual adaptation of the event, Federal Reserve Chairman
Jerome Powell
unfurled a change in the Fed’s framework designed to encourage periods of stronger growth and inflation that would run slightly above the Fed’s 2% target to make up for past shortfalls.
SHARE YOUR THOUGHTS
How should the Federal Reserve respond to higher inflationary pressures? Join the conversation below.
For the main event this year, Mr. Powell is set to speak Friday on the economic outlook at 10 a.m. ET. ECB board member
Isabel Schnabel
is set to speak on a panel on Saturday. The bulk of the symposium program typically consists of academic-paper presentations and discussions.
Here’s a look at what to watch:
Powell’s Plan
Investors are likely to hang on every word of Mr. Powell’s speech for clues about the pace and destination of the Fed’s current effort to combat inflation. Officials agreed at their meeting last month they needed to continue raising interest rates. But they signaled greater caution about the pace of future increases, with some more nervous about overdoing them.
Fed officials are likely to debate raising rates by half a percentage point or 0.75 point at their next meeting, Sept. 20-21. Mr. Powell isn’t likely to deliver a strong argument for either option, analysts said, because the central bank has said it is being guided by coming data on inflation, growth and employment.
But Mr. Powell’s suggestion that the central bank might slow the pace of increases at a news conference last month led to a market rally that could have undercut the Fed’s effort to raise borrowing costs in a way that will slow spending, investment and hiring, said
David Mericle,
chief U.S. economist at
Goldman Sachs.
The Fed’s goal right now is to keep growth below the 2% trend that is expected to prevail over time, but not so low that it causes a recession, to bring inflation down. After last month’s meeting, “I’m sure they saw the easing in financial conditions as unhelpful to the project of keeping inflation on a below-trend growth path and solve inflation in a gentle way,” Mr. Mericle said.
The Fed is trying to walk a delicate balance. Mr. Powell signaled at the Fed’s past two meetings that officials weren’t trying to cause a recession. In July, officials indicated more concern that moving rates up too quickly could endanger that goal.
At the same time, officials don’t want to lead investors to think they are giving up too soon on bringing down inflation. Among investors, “there is a huge expectation that at the first sign of even a little bit of weakness in the real economy, the Fed is going back to its tried-and-true playbook” of ending rate increases and potentially providing stimulus, said
Sonal Desai,
chief investment officer of Franklin Templeton Fixed Income.
It could be difficult for Mr. Powell to fully dispel those expectations because they have been built over decades of central bank policy in an environment with lower inflation, analysts said. One way to make progress would be for Mr. Powell to signal rates could stay higher for longer once the Fed is done lifting them.
Supply Constraints
The theme of this year’s conference, which concludes Saturday, is “Reassessing Constraints on the Economy and Policy.” The symposium is set to explore the emergence of economic constraints during the pandemic, including potential limits on the economy to supply goods and services in the same ways that were possible before the pandemic.
Since the 1990s, favorable tailwinds from globalization, technological advances and demographics allowed the Fed to pursue policies that simultaneously kept inflation and unemployment low, something economists later dubbed the “divine coincidence.” That was possible when the main threats to the economy were “demand shocks”—pullbacks in hiring, consumer spending and business investment—which slow both inflation and growth, as in the recessions of 2001 and 2007-09.
But supply shocks that curtail the economy’s ability to provide goods and services, which in turn hurt growth and spurred inflation, are a bigger challenge today. Central banks could face more difficult choices between shoring up growth and supporting low inflation, because attacking inflation invariably means damping growth and employment.
That could give Mr. Powell an opportunity to discuss how changes to labor markets, supply-chain management and geopolitical developments might influence the trade-offs central banks could confront going forward.
Risk Management
Returning to an in-person gathering could also facilitate a more constructive dynamic between central bankers, academics and other former policy makers who have traditionally attended the mountain gathering, because it allows for hallway conversations and informal deliberation that doesn’t occur over Zoom. Because central bankers around the world face high inflation, the in-person meeting offers them a chance to coordinate their views in a way that would be harder via a webinar.
The Fed has raised interest rates at its fastest pace in decades so far this year, compressing the entire rate-rise cycle from 2015-2018 into their past four policy meetings beginning in March, when officials lifted their benchmark rate from near zero. That marks a rapid about-face from one year ago, when in his speech at the same (virtual) event, Mr. Powell explained why the central bank wasn’t responding to higher inflation.
Through the summer, Fed officials have been unusually united over their goal, but if the labor market cools and the economy slows, Mr. Powell could face a trickier task forging consensus. Ms. Desai said she doesn’t think the economy is facing a recession, but she would like to hear more about the Fed’s expectation that the unemployment rate will rise as a result of current monetary tightening.
“They’re saying the right things: ‘Inflation is a problem. Inflation is my problem,’ ” said
Ricardo Reis,
an economist at the London School of Economics. “That’s the opposite of 12 months ago. You regain your credibility if you convince workers when they go negotiate their wages, they can count on inflation going back to 3% or 4% in the next few years.”
Economists outside the Fed are increasingly divided over how aggressively the central bank should continue lifting rates. One camp says even if inflation falls during the next 12 months, it is very likely to settle at 4% or higher, a level that most Fed officials would deem unacceptably high. Another camp warns that the Fed, embarrassed in retrospect at waiting too long to pull back its support of an economy that didn’t need it in 2021, will compound that error by tightening too much.
“We are in a situation we don’t fully understand, so I am very nervous about taking very strong stands in either direction,” said
Raghuram Rajan,
the former governor of the Reserve Bank of India.
Write to Nick Timiraos at [email protected]
Corrections & Amplifications
Investors expect the Fed to abandon plans to raise rates at the first sign of an economic slowdown. An earlier version of this article incorrectly said investors expect the Fed to end rate cuts at the first sign of economic weakness. Corrected on Aug. 25.
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Federal Reserve officials returning to Grand Teton National Park for the Kansas City Fed’s annual economic symposium on Thursday face one of the most challenging economic backdrops since officials began hosting the event in Jackson Hole, Wyo., in 1982.
U.S. inflation is running close to a 40-year high, while unemployment is at half-century lows. Global economies are reeling from the effect of multiple shocks—the coronavirus pandemic, a massive fiscal and monetary policy response, and the fallout from Russia’s war in Ukraine. Central bankers could soon confront difficult trade-offs between bringing down inflation and preventing a large rise in unemployment.
The annual gathering—the first in-person one since 2019 after a pandemic-induced hiatus—has been a staging ground for high drama in the past. In 2008, officials grappled with a deepening financial crisis, and in 2014, then-European Central Bank President
Mario Draghi
laid the groundwork for a bond-buying campaign to stimulate the European economy.
Two years ago, during a virtual adaptation of the event, Federal Reserve Chairman
Jerome Powell
unfurled a change in the Fed’s framework designed to encourage periods of stronger growth and inflation that would run slightly above the Fed’s 2% target to make up for past shortfalls.
SHARE YOUR THOUGHTS
How should the Federal Reserve respond to higher inflationary pressures? Join the conversation below.
For the main event this year, Mr. Powell is set to speak Friday on the economic outlook at 10 a.m. ET. ECB board member
Isabel Schnabel
is set to speak on a panel on Saturday. The bulk of the symposium program typically consists of academic-paper presentations and discussions.
Here’s a look at what to watch:
Powell’s Plan
Investors are likely to hang on every word of Mr. Powell’s speech for clues about the pace and destination of the Fed’s current effort to combat inflation. Officials agreed at their meeting last month they needed to continue raising interest rates. But they signaled greater caution about the pace of future increases, with some more nervous about overdoing them.
Fed officials are likely to debate raising rates by half a percentage point or 0.75 point at their next meeting, Sept. 20-21. Mr. Powell isn’t likely to deliver a strong argument for either option, analysts said, because the central bank has said it is being guided by coming data on inflation, growth and employment.
But Mr. Powell’s suggestion that the central bank might slow the pace of increases at a news conference last month led to a market rally that could have undercut the Fed’s effort to raise borrowing costs in a way that will slow spending, investment and hiring, said
David Mericle,
chief U.S. economist at
Goldman Sachs.
The Fed’s goal right now is to keep growth below the 2% trend that is expected to prevail over time, but not so low that it causes a recession, to bring inflation down. After last month’s meeting, “I’m sure they saw the easing in financial conditions as unhelpful to the project of keeping inflation on a below-trend growth path and solve inflation in a gentle way,” Mr. Mericle said.
The Fed is trying to walk a delicate balance. Mr. Powell signaled at the Fed’s past two meetings that officials weren’t trying to cause a recession. In July, officials indicated more concern that moving rates up too quickly could endanger that goal.
At the same time, officials don’t want to lead investors to think they are giving up too soon on bringing down inflation. Among investors, “there is a huge expectation that at the first sign of even a little bit of weakness in the real economy, the Fed is going back to its tried-and-true playbook” of ending rate increases and potentially providing stimulus, said
Sonal Desai,
chief investment officer of Franklin Templeton Fixed Income.
It could be difficult for Mr. Powell to fully dispel those expectations because they have been built over decades of central bank policy in an environment with lower inflation, analysts said. One way to make progress would be for Mr. Powell to signal rates could stay higher for longer once the Fed is done lifting them.
Supply Constraints
The theme of this year’s conference, which concludes Saturday, is “Reassessing Constraints on the Economy and Policy.” The symposium is set to explore the emergence of economic constraints during the pandemic, including potential limits on the economy to supply goods and services in the same ways that were possible before the pandemic.
Since the 1990s, favorable tailwinds from globalization, technological advances and demographics allowed the Fed to pursue policies that simultaneously kept inflation and unemployment low, something economists later dubbed the “divine coincidence.” That was possible when the main threats to the economy were “demand shocks”—pullbacks in hiring, consumer spending and business investment—which slow both inflation and growth, as in the recessions of 2001 and 2007-09.
But supply shocks that curtail the economy’s ability to provide goods and services, which in turn hurt growth and spurred inflation, are a bigger challenge today. Central banks could face more difficult choices between shoring up growth and supporting low inflation, because attacking inflation invariably means damping growth and employment.
That could give Mr. Powell an opportunity to discuss how changes to labor markets, supply-chain management and geopolitical developments might influence the trade-offs central banks could confront going forward.
Risk Management
Returning to an in-person gathering could also facilitate a more constructive dynamic between central bankers, academics and other former policy makers who have traditionally attended the mountain gathering, because it allows for hallway conversations and informal deliberation that doesn’t occur over Zoom. Because central bankers around the world face high inflation, the in-person meeting offers them a chance to coordinate their views in a way that would be harder via a webinar.
The Fed has raised interest rates at its fastest pace in decades so far this year, compressing the entire rate-rise cycle from 2015-2018 into their past four policy meetings beginning in March, when officials lifted their benchmark rate from near zero. That marks a rapid about-face from one year ago, when in his speech at the same (virtual) event, Mr. Powell explained why the central bank wasn’t responding to higher inflation.
Through the summer, Fed officials have been unusually united over their goal, but if the labor market cools and the economy slows, Mr. Powell could face a trickier task forging consensus. Ms. Desai said she doesn’t think the economy is facing a recession, but she would like to hear more about the Fed’s expectation that the unemployment rate will rise as a result of current monetary tightening.
“They’re saying the right things: ‘Inflation is a problem. Inflation is my problem,’ ” said
Ricardo Reis,
an economist at the London School of Economics. “That’s the opposite of 12 months ago. You regain your credibility if you convince workers when they go negotiate their wages, they can count on inflation going back to 3% or 4% in the next few years.”
Economists outside the Fed are increasingly divided over how aggressively the central bank should continue lifting rates. One camp says even if inflation falls during the next 12 months, it is very likely to settle at 4% or higher, a level that most Fed officials would deem unacceptably high. Another camp warns that the Fed, embarrassed in retrospect at waiting too long to pull back its support of an economy that didn’t need it in 2021, will compound that error by tightening too much.
“We are in a situation we don’t fully understand, so I am very nervous about taking very strong stands in either direction,” said
Raghuram Rajan,
the former governor of the Reserve Bank of India.
Write to Nick Timiraos at [email protected]
Corrections & Amplifications
Investors expect the Fed to abandon plans to raise rates at the first sign of an economic slowdown. An earlier version of this article incorrectly said investors expect the Fed to end rate cuts at the first sign of economic weakness. Corrected on Aug. 25.
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
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