By Howard Schneider
JACKSON HOLE, Wyoming (Reuters) – U.S. economic data is giving the Federal Reserve the green light to chop rates of interest, financial markets are aligned for the primary move, and the central bank all but gave the sport away on Wednesday when a readout of its July meeting showed a “overwhelming majority” of policymakers agreed the policy easing likely would begin next month.
With all that in place, Fed Chair Jerome Powell’s goal in his keynote speech on Friday to the Kansas City Fed’s annual Jackson Hole research conference could also be less about further shaping expectations and more about assessing where the economy stands ahead of what he has called a “consequential” first step.
“I do not think he must do quite a bit beyond the press conference in July,” said Richard Clarida, a former Fed vice chair who’s now global economic adviser for Pimco, referring to how Powell leaned strongly toward a rate cut on the Sept. 17-18 meeting in remarks to reporters after the July 30-31 meeting.
“You is not going to get ‘mission completed,'” Clarida said, “but he might look back on the last two years, where we were and where we’re, and acknowledge that they’re close” to taming the worst outbreak of inflation in 40 years.
Powell will take the rostrum at 10 a.m. EDT (1400 GMT) in a distant lodge in Wyoming’s Grand Teton National Park to deal with a gathering that has turn into a world platform for central bank officials to shape views of monetary policy and the economy.
With one exception, the six speeches Powell has delivered to the conference since becoming Fed chief in 2018 have been largely explanatory, designed less to influence short-term policy expectations than to put out how officials were excited about major structural issues or, because the start of the COVID-19 pandemic, detailing the mechanics of inflation.
The exception was in 2022 because the Fed fought to maintain public expectations about high inflation in check: Powell delivered a terse, market-moving address meant to convey his seriousness about defending the central bank’s 2% inflation goal. Some called it his “Volcker moment,” a reference to Paul Volcker, the Fed chief who triggered a recession within the early Eighties with punishing rates of interest to interrupt an inflationary cycle.
REACTION FUNCTION
That is a consequence the Powell Fed has dodged – to date. Inflation crested at levels not seen because the Volcker era and two years later is roughly half a percentage point above goal. The unemployment rate, at 4.3%, is well below its 5.7% long-run average. And financial markets seem in sync with where the Fed is heading.
In light of that, former Fed staff, policymakers and outdoors analysts said Powell may perhaps revert to his explanatory norm, perhaps sketching out in broad terms how the central bank will approach its coming easing cycle or delving into lessons learned over two years about inflation’s causes and cures.
The conference theme – how monetary policy impacts the economy – would fit either.
William English, a former head of the Fed’s monetary affairs division who’s now a professor on the Yale School of Management, said he felt the moment called for a general outline concerning the approach to cutting rates.
Because Fed policymakers at next month’s meeting will update their rate of interest projections for this 12 months and 2025, Powell won’t want to offer detailed forward guidance about what’s to come back – a risk in itself for the possible market response it could trigger, or the chance coming data could push in a special direction.
Powell as a substitute could provide some background for the general public and markets to grasp how the Fed will respond because the economy evolves, English said. “As an instance the economy doesn’t go as we expect. What would that mean for policy? … What’s it going to take to maneuver faster or slower?”
THE OTHER MANDATE
Powell and other Fed officials have turn into fans of describing different economic scenarios, a technique that enables them to offer a baseline outlook, but in addition convey uncertainty around what might occur and the way different outcomes might cause them to react.
Some, for instance, have begun to fret the economy is at some extent where the unemployment rate could rise fast and much enough to derail the “soft-landing” from inflation that they thought was nearby.
Yet it’s unclear how the Fed, at this point, thinks about “maximum employment” – certainly one of its two goals alongside stable inflation – and the degree to which officials are willing to tolerate rising joblessness to wring one other one quarter or one half of a percentage point from inflation.
Antulio Bomfim, a former special adviser to Powell and now the pinnacle of world macro for Northern Trust Asset Management’s fixed-income team, agreed that the Fed chief will likely avoid short-term guidance in favor of a discussion about broader issues – perhaps attempting to capture what the central bank has just lived through and the way coming labor and inflation dynamics may differ from those before the pandemic.
“We’re sort of at an inflection point for policy, potentially for the economy too … Inflection points are very difficult to navigate,” Bomfim said.
Open questions linger concerning the economy that is emerging, including whether inflation will prove a more persistent headache for central banks after years of running soft before the pandemic, and whether job market dynamics have shifted and should imply higher unemployment rates than the Fed thought it could achieve based on the economy’s pre-COVID-19 performance.
With inflation being such a high priority “over the past couple of years, the Federal Reserve … was behaving like a single mandate central bank,” Bomfim said. “And now we are usually not just within the transition from hikes to cuts, but in addition transitioning back to what I might call a more normal state of affairs.”
(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)