Powell’s highly anticipated speech will also be crucial to his own credibility. In his remarks at last year’s conference, he doubled down on his belief that inflation would be temporary. The speech has not aged well.
“The Fed feels like a passenger on the bus, along with Wall Street and investors and economists. The Fed doesn’t feel like the driver of the bus,” said Michael Strain, director of economic policy studies at the conservative American Enterprise Institute. “One way to assert yourself as a bus driver is to clearly state what you did wrong, explain why you got it wrong, and communicate how you will do things differently in the future.”
To bring inflation down from its 40-year highs, the Fed must rely on a powerful tool: interest rates. Higher rates are designed to slow demand by making many loans, such as cars or mortgages, more expensive. The housing market, for example, is cooling as soaring mortgage rates push would-be homeowners out.
Inflation calmed down a bit in Julywith an increase of 8.5% compared to last year — down from previous month’s high — like drop gasoline prices contributed to the decline overall costs. But Fed leaders say they need to see months of sustained improvement before they know if the rate hikes are working.
The challenge is compounded by the fact that rate hikes operate with a lag, and the increases the bank is making now could dampen economic activity later this year or early next year. Already, the US economy decreased in the first two quarters of 2022raising fears of a recession and suggesting that the economy is already slowing markedly, even if inflation remains high.
“July seemed like there was some loosening of those price pressures, but definitely not enough for you to say, ‘we’re in the right direction,'” the Kansas City Fed chairwoman said. Esther George. Told Yahoo Finance Thursday. “So I think we have more data to see. And I think we still have some work to do, to start seeing that trend go down. »
Part of the problem is that interest rates are a crude tactic, and they cannot address all the ways people experience inflation in their daily lives. Rate hikes cannot build new homes or keep gas prices low. And they can’t boost consumer confidence, especially at a time when many families and business owners don’t feel the economy is working for them, despite a strong job market and resilient consumer spending.
Politically, high inflation weighed on the president Biden’s approval ratings and have complicated the Democratic Party’s legislative agenda. That’s not strictly a problem for the Fed, which is designed to be independent and whose officials serve mandates that don’t align directly with presidential administrations. But it puts the central bank’s job under greater scrutiny from politicians.
Earlier this month, the White House and congressional Democrats secured a major victory with the passage of Inflation Reduction Act, which focuses on the climate crisis, cutting healthcare costs and raising taxes on big business. But Republicans continue to hammer Democrats for heavy stimulus packages earlier in the pandemic, and argue that more federal spending or student loan debt forgiveness will further overheat the economy.
For Fed officials who visited Jackson Hole this week, the past few years have been dizzying. It remains extremely difficult for officials to get a clear reading of the economy. And the cost of to be wrong in these assessments was high.
In last year’s jackson hole speech, Powell explained why he believed inflation would be a temporary feature of the economic recovery from the pandemic-induced recession. The Fed was getting closer to cutting some of its emergency support for the economy, but interest rate hikes were far from on the cards. Powell also delivered his speech virtually, since the summit was canceled during the outbreak of the delta variant of the coronavirus last summer.
Twelve months later, and now back in Jackson Hole for the first time since the pandemic began, the Fed is locked in a race to contain inflation that has risen and spread across the economy. Supply chain issues, strong consumer demand and Russia’s invasion of Ukraine have kept the prices of gas, groceries, rent and everything else high. And suddenly, the central bank raised rates at its most aggressive pace in decades.
The Fed has hiked rates four times this year, the last time by three-quarters of a percentage point in July. The general expectation is that more hikes will follow and that the Fed will raise rates again at policy meetings in September, November and December. But it is unclear whether central bankers will follow such strong increases or whether they will decide to pare the increases to avoid slowing the economy too abruptly and triggering a recession.
It would be unusual for Powell to use his speech to say exactly what the Fed plans to do next month. Still, markets are watching closely for any sign of what is to come. Stocks could boom on Friday if Powell is more energetic or more relaxed than expected.
“He wanted to tell a somewhat hopeful story: ‘This is something we can accomplish,'” said Tim Duy, Fed expert at the University of Oregon and chief economist at SGH. Macro Advisors. “