Federal Reserve Chairman Jerome Powell didn’t mince his words. For weeks there has been speculation and predictions about what the message would be at this year’s monetary policy seminar in Jackson Hole, Wyoming. After waiting so long, in less than 30 seconds he has taken the hawk’s clutches out of monetary policy and made it clear that inflation is still “too high” and that his pulse will not waver when it comes to raising interest rates further , if he thinks about it it is necessary. Of course, he has said he will proceed “cautiously” while the increases already made take effect, which…
Federal Reserve Chairman Jerome Powell didn’t mince his words. For weeks there has been speculation and predictions about what the message would be at this year’s monetary policy seminar in Jackson Hole, Wyoming. After waiting for so long, in less than 30 seconds he has brought out the claws of the monetary policy hawk and made it clear that inflation is still “too high” and that he will not shy away from raising interest rates further if he thinks about it. necessary. Of course, he has said he will proceed “cautiously” while the hikes already implemented take effect, prompting the market to stick with its bet for a pause in rate hikes in September.
“During the Jackson Hole Symposium last year, I delivered a short direct message. My remarks this year will take a little longer, but the message is the same: the Fed’s job is to get inflation down to our 2% target, and we will get there. Last year we tightened our monetary policy significantly. Although inflation has passed its peak, it is still too high. “We are prepared to raise interest rates further if necessary and we intend to keep monetary policy at a restrictive level until we are sure that inflation falls sustainably towards our target,” he began his intervention.
The Federal Reserve chairman acknowledged that while progress has been made, the battle against inflation is not yet won: “There is still a long way to go to return to price stability,” he said. “Additional evidence of continued above-trend growth could threaten inflation gains and justify further tightening of monetary policy,” it warned.
Powell has ignored the siren calls calling for a revision of the long-term inflation target to 3%. “2% is and remains our inflation target. “We are committed to achieving and maintaining a sufficiently restrictive monetary policy to reduce inflation to that level over time,” he said emphatically.
In a changing environment full of uncertainties and taking into account the lag with which interest rate increases affect the economy, the Federal Reserve is currently unclear what the neutral interest rate that neither drives nor slows down the economy would look like. Powell has admitted that the current level of 5.25% to 5.5% is restrictive, but it is not clear whether it is enough: “It is of course difficult to know in real time when this restrictive stance has been reached.” Control inflation, he said.
The impression is that Powell would rather over-brake than fall short at the moment. Rate hikes have slowed demand, but it remains robust and labor market tensions continue with unemployment near its lowest level in half a century. The Federal Reserve’s monetary policy appears to be achieving the economy’s long-awaited soft landing, that is, reducing inflation without actually triggering a full-blown recession.
In fact, recession has recently disappeared from his economists’ central scenario, but given the election, Powell has given clear signals that inflation is his priority and that he is willing to pay the price of an economic downturn if it does should be necessary to control it. At a minimum, a period of “below-trend economic growth” and “some softening in labor market conditions” will be required.
Powell is aware that the rate hikes have not yet had their full impact and has said it is not easy to estimate how far they should go. “Uncertainties complicate our task of balancing the risk of tightening monetary policy too much with the risk of tightening too little. If too little is done, above-target inflation could take hold and ultimately force monetary policy to drive more persistent inflation out of the economy, with high costs for jobs. Doing too much could also cause unnecessary harm to the economy. “As usual, when the sky is cloudy, we use the stars as a guide,” he explained.
Two years ago, Powell believed that inflation was a temporary problem due to supply constraints caused by the fallout from the pandemic and supply chain bottlenecks. The Federal Reserve later admitted that it had made a misdiagnosis. Last year, when inflation topped 9.1% (it is now at 3.2%), Powell surprised with a tougher-than-expected speech that punished stock markets. This year the impact was smaller because investors had already anticipated it.
He then argued that controlling inflation would require “inflicting some suffering on families and businesses.” Powell, a great admirer of his predecessor Paul Volcker, who held the office from 1979 to 1987, then recalled that the success he had in the early 1980s was due to several failed attempts to reduce inflation over the previous 15 years reduce. Arthur Burns, President of the Federal Reserve in the 1970s, was tolerant of price trends, and inflation dominated the U.S. economy for a decade. Powell turned the title of Volcker’s autobiography, “Keep at it,” into his own catchphrase. “We have to keep doing this until the job is done,” he said in Jackson Hole, repeating it in subsequent months.
And the Federal Reserve joined in. A year ago, interest rates were in the 2.25% to 2.5% range. Since then, Powell has raised the price of money another three points, to 5.25% to 5.5% at the last meeting, the highest rate in 22 years and well above what was expected 12 months ago. The Federal Reserve Chairman has repeatedly pointed out that even more important than the maximum they can reach in this monetary tightening cycle is how long they stay high.
What will happen at the next meetings of the Federal Reserve’s Monetary Policy Committee? Powell preferred not to get wet. “In the coming meetings we will assess our progress based on all data and the evolving outlook and risks. Based on this assessment, we will proceed with caution in deciding whether to further tighten monetary policy or, on the contrary, to keep the official interest rate constant until new data.” In fact, the market expects another pause at the meeting on September 20 the interest rate increases and there is disagreement about whether there will be further interest rate increases later in the year.
Powell doesn’t want a possible break to be interpreted as a sign of weakness, and perhaps that’s why he decided to “stay tuned” at the end. “Restoring price stability is critical to fulfilling both aspects of our dual mandate. We need price stability to achieve a sustained period of healthy labor market conditions that benefits everyone, and we will stick with it until the job is done.”
