When Federal Reserve Chairman Jerome Powell delivered his most closely scrutinized speech of the year on Friday, investors and economists will turn to his comments for any clues as to how fast the Fed might raise its key interest rate — and by how much. by time .
With inflation hovering near a four-decade high — around 9% — Powell will stress that the Fed is determined to bring it down to its 2% target, whatever it may be. The Fed’s rate hike may well beat inflation on time. But there are fears that they may cause slowdown in the process.
Powell’s remarks will kick off the Fed’s annual economic symposium in Jackson Hole, the first time since 2019 that central bankers’ conference will be held in person, after going virtual for two years during the COVID-19 pandemic.
Since March, the Fed has implemented its fastest pace of rate hikes in decades to combat inflation, which has punished households with rising costs of food, gas, rent and other necessities. The central bank has raised its benchmark rate by 2 full percentage points from 2.25% to 2.5% in just four sittings.
Those increases have led to higher costs for mortgages, car loans and other consumer and business lending. Home sales have been falling since the Fed first indicated it would raise borrowing costs.
Yet the central bank finds itself at a turning point. In a news conference after its last policy meeting in late July, Powell suggested the Fed’s decision to slow its rate hikes after making historically big moves — two straight three-quarter-point increases in June and July. can take.
He also said the Fed’s aggressive moves have raised its key short-term rate to a point at which it is neither stimulating nor slowing growth. Its benchmark rate was close to zero from the start of the pandemic until this March as the Fed sought to strengthen the economy.
Fed-watchers expect Powell to send some hints on Friday about how big the central bank will announce at its next meeting in late September or how long policymakers will keep rates high. They expect to learn more about what factors policymakers will consider in the coming months to determine whether lending rates have become too high.
“They faced uncertainty about the outlook and tried to explain what they would be looking to make in their policy decisions,” said William English, a Yale School of Management professor and former Fed senior economist.
For example, how far should inflation fall before Powell and his colleagues postpone their rate hikes? What will the Fed do if unemployment, now at a half-century low, starts rising? If the economy heads into recession, many investors think the Fed may pivot and actually cut rates again. But if inflation is not under control now, it will be less likely.
In June, policymakers at the Fed indicated they expected their key rate to end in the range of 3.25% to 3.5% by 2022 and then rise further to between 3.75% and 4% the following year. If rates reach their projected levels later this year, they will be at their highest point since 2008. Powell is betting he can create a high-risk outcome: to ease inflationary pressures to slow the economy, yet not so much as to trigger a recession.
His task is complicated by a hazy picture of the economy: On Thursday, the government said the economy shrank at a 0.6% annual rate in the April-June period, the second straight quarter of contraction. Yet employers are still increasingly hiring, and the number of people receiving unemployment assistance, a measure of layoffs, is relatively small.
At the same time, inflation is still very high, although there are signs of some moderation, especially in the form of a fall in gas prices.
“The data is very confusing,” said English. “It’s hard to know what the exact situation is.”
At its meeting in July, Fed policymakers expressed two competing concerns that highlighted their delicate work.
According to the minutes of that meeting, officials – who are not identified by name – have prioritized their inflation fight. Still, some officials said there was a risk the Fed would raise borrowing costs more than necessary, threatening a recession. If inflation falls closer to the Fed’s 2% target and the economy weakens further, it may be difficult to reconcile those differing views.
After last month’s Fed meeting, Powell told reporters that the size of the next rate hike “will depend on the data received between now and then.”
He also said that as rates go up, “it would be appropriate to slow down the pace” and assess how the Fed’s actions have affected the economy. Those comments helped ignite a stock-market rally as many investors took them to mean that the Fed would be less aggressive in the coming months.
Since then, however, many Fed officials have pushed back against any notion that they are close to easing their inflation fight.
“I would like to see a period of continued inflation under control, and for as long as we think we will have to continue to move rates higher,” Federal Reserve Bank of Richmond President Tom Barkin told CNBC this month.
On Friday, Powell could also address how the pandemic caused a range of supply problems for the economy and what it could mean for Fed policy. The shutdown of COVID-19 led to a shortage of semiconductors and other components as well as workers. Many of them remain short of supply. And Russia’s invasion of Ukraine cut off supplies of oil and agricultural commodities, raising global costs of gas and food.
Such “supply shocks” present a particular challenge to the Fed because its policy tools include raising or lowering rates to increase or slow down demand. Traditionally, the Fed ignores the effects of supply shocks on inflation under the assumption that they will prove to be temporary.
In fact, at last year’s Jackson Hole symposium, Powell listed five reasons why he thought inflation would be “transient.” Yet instead it persists.
As a result, some economists think Powell can play it safe this time and spend most of his speech reviewing the economic outlook.
“This is not the time to introduce a larger framework,” said Vincent Reinhart, chief economist at Dreyfus & Mellon and a former Fed employee. “They’re trying to figure out how to keep tightening up and do something the Federal Reserve hasn’t had to do in 40 years.”
Powell should “repeat the facts, get out there,” Reinhart said.