Federal Reserve Chairman Jerome Powell testifies before the House Financial Services Committee in Washington, DC on June 21, 2023. Powell testified during the hearing on the Federal Reserve’s semi-annual monetary policy report.
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Since assuming the position of Federal Reserve Chairman in 2018, Jerome Powell has used his annual Jackson Hole Retreat addresses to advance political agendas that span from one end of the political arena to the other.
For this year’s edition, many are expecting the central bank governor to change his stance so that he hits the ball more or less right in the middle.
With inflation slowing and the economy still on solid ground, Powell may feel less need to guide the public and financial markets and more inclined to adopt a stance on monetary policy that says how to see them.
“I just think he’s going to play it in the middle as much as possible,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America. “It just gives him more options. He doesn’t want to be cornered one way or another.”
For example, if Powell is indeed pursuing a non-binding strategy, that will place the speech in the middle of the surprisingly aggressive – and tight – 2022 pronouncements warning of higher interest rates and economic “pain” and the announcement of a new framework for 2020 The Fed would withhold rate hikes until “full and inclusive” employment is achieved.
The speech begins Friday at 10:05 a.m. ET.
Nervous Markets
Despite expectations for a dovish Powell, markets braced for an unpleasant surprise on Thursday as stocks sold off and Treasury yields rose. According to DataTrek Research, last year’s speech was also marked by upbeat anticipation and poor reception: the S&P 500 lost 2% in the five trading days leading up to the speech and 5.5% in the five days that followed.
However, a day of vacillation on Wall Street is unlikely to deter Powell from delivering his intended message.
“I don’t know how hawkish it has to be, given that by their very definition, interest rates are clearly in the restrictive territory and the market has finally accepted the Fed’s own forecast that rate cuts won’t come until midway.” or the second half of next year,” said LaVorgna, who was chief economist at the National Economic Council under former President Donald Trump.
“So it’s not as if the Fed has to defend itself against a market narrative that expects easing anytime soon, which has essentially been the case for the last 12 months,” he added.
In fact, markets finally seem to have embraced the idea that the Fed has held its own against inflation and will not back down until it sees more compelling evidence that the recent spate of positive price news is holding up.
But Powell will have a needle to thread – reassuring the market that the Fed will not repeat its past mistakes on inflation without exerting too much pressure and plunging the economy into a seemingly avoidable recession.
“He needs to set the tone that the Fed is going to get the job done. The fact is, their credibility is at stake. It’s about his legacy,” said Quincy Krosby, chief global strategist at LPL Financial. “He wants to be a bit more aggressive than neutral. But he won’t deliver what he delivered last year. The market understood that.”
Inflation is not dead yet
That might be easier said than done. Inflation has eased into the 3% to 4% range, but there are some signs that the slowdown may be reversing.
Energy prices have risen over the summer and some factors that contributed to the decline in inflation figures, such as a statistical adjustment to health insurance costs, are disappearing. A Cleveland Fed inflation indicator expects August numbers to post a significant increase. Bond yields have been rising lately, a reaction that could at least partly point to an expected rise in inflation.
At the same time, consumers are increasingly feeling pain. Total credit card debt has surpassed $1 trillion for the first time, and the San Francisco Fed recently said that excess consumer savings accumulated through government transfer payments will be depleted in a few months.
Even if workers’ wages increase in real terms, inflation is still a drag.
“When all is said and done, if we don’t suppress inflation, how far will those wages go up? With their credit cards, with groceries, with energy,” Krosby said. “That is the dilemma for him. He has fallen into a political trap.”
Powell chairs a Fed that’s mostly biased towards keeping rates higher, though cuts are possible next year.
Still no “mission accomplished”
Philadelphia Fed President Patrick Harker is one of those who believes the Fed has done enough for now.
“What I’ve heard loud and clear during my summer travels is, ‘Please, you’ve climbed very quickly. We have to process this. We need to take some time to figure things out,’” Harker told CNBC’s Steve Liesman during a hearing interview Thursday from Jackson Hole. “And you hear that loud and clear from community banks. But we even hear it from business leaders. Let’s just take stock of what you’ve already done before you do any more.”
While the temptation for the Fed now may be to signal that it has largely won the inflation war, many market participants believe this is unwise.
“It would be crazy to display the ‘mission accomplished’ banner at this point and he won’t, but I see no reason for him to launch a military surprise either,” said Krishna Guha, head of global policy and central bank strategy for Evercore ISI.
Some on Wall Street suggest that Powell could address the question of where he thinks interest rates will go over the longer term, rather than over the next few months. Specifically, they’re looking for clues to the natural level of interest rates that are neither restrictive nor stimulative, the “r-star (r*)” value he spoke of in his first presentation at Jackson Hole in 2018.
However, the odds of Powell reaching out to R-Star don’t seem high.
“There was kind of a general fear that Powell might take a restrictive stance. The concern was much more about what he would say about R-Star and the assumption of high new normal interest rates than how he would characterize the short-term strategy,” Guha said. “There’s just no obvious benefit to him at this point in embracing the idea of a higher R Star. I think he wants to avoid making a strong demand on that.”
In fact, most of the time Powell is expected to avoid making major decisions.
At a time when the chairman should be “turning a winning lap” in Jackson Hole, he’s likely to be more sober in his assessment, said Michael Arone, chief investment strategist at State Street’s US SPDR Business.
“The Fed is probably unconvinced that inflation has been defeated,” Arone said in a note. “That’s why there won’t be a curtain in Jackson Hole. Instead, investors should expect stronger statements from Chairman Powell that the Fed is more committed than ever to fighting inflation.”
Source : www.cnbc.com