Powell has a chance to reset market expectations in Jackson Hole

Powell has a chance to reset market expectations in Jackson Hole

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Federal Reserve Chairman Jerome Powell will have a chance — if he wants to take it — to reset expectations in financial markets when central bankers gather this week for their annual retreat in Jackson Hole.

Powell talks about the economic outlook at 10 am Washington time on Friday and is expected to reaffirm the Fed’s determination to continue raising interest rates to control inflation, though he is unlikely to go so far as to signal how top officials will go when they meet. next month.

“That’s the most important 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 more slowdown in data and instead things pick up, the Fed will have to more actively manage financial conditions.”

Powell’s speech will mark the highlight of the two-day conference in Wyoming’s Grand Teton Mountains. The prestigious event, which in the past has been used by Fed Chairs as a venue to make key policy announcements, brings together top policymakers from around the world.

European Central Bank Executive Board Member Isabel Schnabel speaks at a panel on Saturday. Bank of England Governor Andrew Bailey will be among those present, but ECB President Christine Lagarde is not planning to attend.

US stocks have risen since the Fed’s last policy meeting in late July amid rising expectations that the central bank will begin to ease the pace of tightening, as well as signs that inflationary pressures may be moderating.

Investors were unfazed by policymakers’ strident claims along the way that their fight against inflation is far from over, though the president himself has yet to speak since his July 27 post-meeting press conference.

This year’s conference is being held in person for the first time since 2019. Last year, it moved to a virtual format just days in advance as the delta variant of Covid-19 swept the country. Inflation had risen well above the Fed’s 2% target, but in his speech to the forum, Powell stressed that these pressures were likely to be transient and did not appear broad-based.

Now, a year later, inflation is near its highest levels in four decades and Powell admitted that the Fed’s analysis was incorrect and policymakers should have started raising interest rates sooner.

Given that backdrop — despite the latest monthly consumer price report showing some optimism that inflation may have peaked — Powell is likely to take a hard line, said Kevin Cummins, chief U.S. economist at NatWest Markets in Stamford, Connecticut.

“They’re so focused on doing this in part just because they got it wrong last year with the whole ‘transitional’ thing, and they realize that the only thing they can do now is tighten policy, and that will slow down inflation,” Cummins said.

The Fed raised its benchmark interest rate by three-quarters of a percentage point at its July meeting, after a similar increase the previous month. The consecutive moves marked the fastest pace of tightening since the early 1980s.

At the moment, investors see similar odds of half a point or another three-quarter point increase at the Sept. 20-21 Fed meeting. August’s employment and consumer price figures are due to be released by the Labor Department before then, and are likely to be the determining factor in Fed officials’ choice of options.

In Europe, policymakers are having a similar debate over how big the next rate hike should be. The ECB lags behind its peers in responding to record inflation and only started raising rates in July. After last month’s half-point increase, many policymakers have yet to signal whether they are inclined to take 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 remarks during a panel on the “post-pandemic policy outlook” may shed light on how the ECB plans to juggle short-term challenges such as stubbornly high price pressures and a weakened economy with longer-term ones that include climate change.

Beyond the short term, the big question is how far the Fed and its counterparts around the world will eventually drive interest rates.

Kansas City Fed Chair Esther George, whose bank hosts the annual Jackson Hole symposium, said on Thursday that if policymakers opt for another big increase next month or start cutting to smaller amounts, they they may have to keep raising rates for a while, until they are “completely convinced” that inflation is falling.

“To what extent do you raise rates? I don’t think we’ll know. We won’t know until we start to see how some of these variables come together – how the supply and demand pieces unfold – 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 make it very clear that we’re going to have to be completely convinced that this number is going down.”

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