Every August, the center of the financial world moves to Jackson Hole, Wyoming for the Federal Reserve’s annual Jackson Hole Economic Symposium. This year, the gathering started today and runs through Saturday. While there is enormous financial media attention on this event, and sometimes there are surprises or big announcements, but usually they are pretty mundane. We’ll see how this one goes.
The annual Jackson Hole gathering, as always, features Fed officials giving speeches on the economy, Fed monetary policy and this year the main theme will be inflation which has soared to a 40-year high. Fed Chairman Jerome Powell is the keynote speaker and his presentation will be tomorrow (Friday) morning.
What the markets hope to hear from Chairman Powell is that the Fed will continue raising interest rates just ahead in an attempt to reign-in inflation, but not so much as to send the economy into a recession. But that is a tall order. Inflation as measured by the Consumer Price Index surged to an annual rate of 9.1% in June, the highest level in more than 40 years.
The Fed has maintained its target rate for inflation is 2% for the last several years, and inflation ran well below that level for several years. However, due to the Covid lockdowns of wide swaths of the economy in 2020 and 2021, supply chains of goods and services around the world were seriously disrupted. Now that the global economy is rebounding strongly, these supply chain disruptions have led to shortages of many goods and services which, in turn, have led to price spikes in many areas.
The Fed now faces a daunting challenge to get inflation down from 9.1% in June to anywhere close to its 2% target anytime soon – without spiking interest rates so sharply to virtually ensure a recession. As is clear now, the Fed held interest rates near zero too long. Now it has no good options. Fed Chairman Powell and the other Fed speakers in Jackson Hole have a daunting challenge to put a pretty face on this dilemma. There are no easy fixes now.
The markets will be closely watching the Jackson Hole Economic Symposium — which will return to an in-person format after two years of being held virtually — searching for clues about where the Fed might head next in its attempts to tame rising prices.
“It’s interesting how this August speech of the Fed Chair at Jackson Hole has become such an important platform for the Fed to influence market expectations about policy. It becomes a self-fulfilling prophecy,” said David Wessel of the Brookings Institution.
At the Jackson Hole Symposium, Fed officials and members of the press get to stay at fancy ski resorts, eat great food and do some fishing if they are so inclined, all at someone else’s expense. No wonder they love to go there and cool off in August each year.
The title of this year’s symposium, which kicked off this morning is “Reassessing Constraints on the Economy and Policy.” Inflation is certain to be the hottest, although not the only, topic to be discussed, and nearly every word published or spoken will be painstakingly parsed by traders and analysts for any hint of what it might indicate about the central bank’s policy trajectory.
Of particular interest to market participants is Fed Chair Jerome Powell’s keynote speech on Friday morning. What the markets also want to hear Powell say is that Fed will move to reduce inflation this year, but will be sufficiently confident it can reverse course early next year. I think Powell will have a hard time saying this, at least not convincingly.
The Fed has to thread the needle on policy moves, as well as on how it communicates those intentions. Powell could trigger Wall Street angst (ie – a further selloff in the stock market) if he sounds too hawkish — or not hawkish enough. I wouldn’t want to be in his shoes.
At the Jackson Hole economic summit last year, Powell made the case that surging inflation wouldn’t linger — a prediction that has not aged well and economists worried would tarnish the central bank’s credibility.
At the time, Powell asserted that inflation was confined to a limited set of goods and services and blamed rising prices on the widespread shift in spending as Americans bought all sorts of goods rather than spending money on services, generally speaking. “From long experience we expect the inflation effects of these increases to be transitory,” he said at the time.
“Transitory” is the key word here, in which he meant the spike in inflation would be only temporary. Regular readers will remember I questioned the “transitory” assumption in these pages last year, and further warned that inflation would be much harder for the Fed to bring down than the Fed Chairman suggested.
With inflation still at 8.5%, I rest my case.
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