Powell has chance to reset market expectations in Jackson Hole

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Federal Reserve Chairman Jerome Powell will have a chance — if he wants — to reset expectations in financial markets when central bankers meet this week at their annual retreat in Jackson Hole.

Powell speaks about the economic outlook Friday at 10 a.m. Washington time and is expected to reaffirm the Fed’s determination to keep raising interest rates to tame inflation, though he’ll likely stop short of signaling how the great leaders will go when they meet. next month.

“That’s everybody’s number one question: how well is Powell going to micro-manage financial conditions? We’ve reached a point where the economy is showing signs of slowing down,” Laura Rosner-Warburton said. , senior U.S. economist at MacroPolicy Perspectives in New York, “If we don’t see more of a downturn in the data and things bounce back, then the Fed will have to manage financial conditions more actively.”

Powell’s speech will mark the culmination of the two-day conference in Wyoming’s Grand Teton Mountains. The prestigious event, which in the past has been used by Fed chairs as a venue to make key policy announcements, brings together top policymakers from around the world.

Isabel Schnabel, member of the executive board of the European Central Bank, speaks during a panel on Saturday. Bank of England Governor Andrew Bailey will be among those present, but ECB President Christine Lagarde does not plan to attend.

US stocks have rallied since the Fed’s last policy meeting in late July, amid growing expectations that the central bank will begin to ease the pace of tightening, as well as signs that inflationary pressures may be easing .

Investors have been mostly oblivious to strident assertions by policymakers along the way that their fight against inflation is far from over, although the president himself has yet to speak since his July 27 post-meeting press conference.

This year’s conference is being held in person for the first time since 2019. Last year it was moved to a virtual format days in advance as the delta variant of Covid-19 swept the country. Inflation had by then risen well above the Fed’s 2% target, but in his speech at the forum, Powell stressed that these pressures were likely to prove transitory and did not appear to be widespread.

Now, a year later, inflation is near the highest levels in four decades and Powell admitted the Fed’s analysis was incorrect and policymakers should have started raising interest rates more early.

Given this backdrop — despite the latest monthly consumer price report stoking some optimism that inflation may have peaked — Powell is likely to stick to a hard line, Kevin Cummins said. , chief US economist at NatWest Markets in Stamford, Connecticut.

“They’re so focused on this, partly just because they screwed up last year with the whole ‘transitional’ thing, and they realize the only thing they can do now is tighten up the policy, and that will slow inflation,” Cummins said.

The Fed raised its benchmark interest rate by three-quarters of a percentage point at its July meeting, following an increase of the same magnitude the previous month. The back-to-back moves marked the fastest pace of tightening since the early 1980s.

At the moment, investors are seeing similar odds of a half-point hike or another three-quarter point hike at the Fed’s September 20-21 meeting. August’s employment and consumer price figures are due out from the Labor Department by then, and will likely be the deciding factor in which option Fed officials choose.

In Europe, policymakers are having a similar debate over the size of the next rate hike. The ECB is lagging its peers in responding to record high inflation and only just started raising rates in July. After last month’s half-point hike, many policymakers have yet to indicate whether they’re leaning towards another such step in September or a smaller quarter-point move. as the risks of recession increase.

As the only Executive Council member present at this week’s conference, Schnabel will speak from a position of authority. His remarks during a panel on the “post-pandemic policy outlook” could shed light on how the ECB plans to juggle near-term challenges such as stubbornly high price pressures and a declining economy with longer-term challenges that include climate change.

Beyond the short term, the big question is how far the Fed and its counterparts around the world will eventually raise interest rates.

Kansas City Fed President Esther George, whose bank hosts the annual Jackson Hole symposium, said Thursday that whether policymakers opt for another big hike next month or start moving to smaller ones, they may have to keep raising rates for a while, until they are “completely convinced” that inflation is headed down.

“How high are you raising the rates? I don’t think we’ll find out. We’re not going to know until we start seeing how some of these variables come together – how supply and demand play out – to know exactly where that stopping point is. said George. “But I think, as you have heard others say, we will have to be very clear that we will have to be completely convinced that this number is coming down.

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