Wyoming, – U.S. economic data is giving the Federal Reserve the green light to cut interest rates, financial markets are aligned for the first move, and the central bank all but gave the game away on Wednesday when a readout of its July meeting showed a “vast majority” of policymakers agreed the policy easing likely would begin next month.
With all that in place, Fed Chair Jerome Powell’s goal in his keynote speech on Friday to the Kansas City Fed’s annual Jackson Hole research conference may be less about further shaping expectations and more about assessing where the economy stands ahead of what he has called a “consequential” first step.
“I don’t think he needs to do a lot beyond the press conference in July,” said Richard Clarida, a former Fed vice chair who is now global economic adviser for Pimco, referring to how Powell leaned strongly toward a rate cut at the Sept. 17-18 meeting in remarks to reporters after the July 30-31 meeting.
“You will not get ‘mission accomplished,'” Clarida said, “but he might look back at the last two years, where we were and where we are, and acknowledge that they are close” to taming the worst outbreak of inflation in 40 years.
Powell will take the podium at 10 a.m. EDT (1400 GMT) in a remote lodge in Wyoming’s Grand Teton National Park to address a gathering that has become a global platform for central bank officials to shape views of monetary policy and the economy.
With one exception, the six speeches Powell has delivered to the conference since becoming Fed chief in 2018 have been largely explanatory, designed less to influence short-term policy expectations than to lay out how officials were thinking about major structural issues or, since the start of the COVID-19 pandemic, detailing the mechanics of inflation.
The exception was in 2022 as the Fed fought to keep public expectations about high inflation in check: Powell delivered a terse, market-moving address meant to convey his seriousness about defending the central bank’s 2% inflation target. Some called it his “Volcker moment,” a reference to Paul Volcker, the Fed chief who triggered a recession in the early 1980s with punishing interest rates to break an inflationary cycle.
REACTION FUNCTION
That’s a consequence the Powell Fed has dodged – so far. Inflation crested at levels not seen since the Volcker era and two years later is roughly half a percentage point above target. The unemployment rate, at 4.3%, is well below its 5.7% long-run average. And financial markets seem in sync with where the Fed is heading.
In light of that, former Fed staff, policymakers and outside analysts said Powell may well revert to his explanatory norm, perhaps sketching out in broad terms how the central bank will approach its coming easing cycle or delving into lessons learned over two years about inflation’s causes and cures.
The conference theme – how monetary policy impacts the economy – would fit either.
William English, a former head of the Fed’s monetary affairs division who is now a professor at the Yale School of Management, said he felt the moment called for a general outline about the approach to cutting rates.
Because Fed policymakers at next month’s meeting will update their interest rate projections for this year and 2025, Powell won’t want to provide detailed forward guidance about what’s to come – a risk in itself for the possible market reaction it could trigger, or the possibility coming data could push in a different direction.
Powell instead could provide some background for the public and markets to understand how the Fed will respond as the economy evolves, English said. “Lets say the economy does not go as we expect. What would that mean for policy? … What is it going to take to move faster or slower?”
THE OTHER MANDATE
Powell and other Fed officials have become fans of describing different economic scenarios, a strategy that allows them to provide a baseline outlook, but also convey uncertainty around what might happen and how different outcomes might cause them to react.
Some, for example, have begun to worry the economy is at a point where the unemployment rate could rise fast and far enough to derail the “soft-landing” from inflation that they thought was within reach.
Yet it is unclear how the Fed, at this point, thinks about “maximum employment” – one of its two goals alongside stable inflation – and the degree to which officials are willing to tolerate rising joblessness to wring another one quarter or one half of a percentage point from inflation.
Antulio Bomfim, a former special adviser to Powell and now the head of global macro for Northern Trust Asset Management’s fixed-income team, agreed that the Fed chief will likely steer clear of short-term guidance in favor of a discussion about broader issues – perhaps trying to capture what the central bank has just lived through and how coming labor and inflation dynamics may differ from those before the pandemic.
“We’re kind of at an inflection point for policy, potentially for the economy too … Inflection points are very difficult to navigate,” Bomfim said.
Open questions linger about the economy that’s emerging, including whether inflation will prove a more persistent headache for central banks after years of running soft before the pandemic, and whether job market dynamics have shifted and may imply higher unemployment rates than the Fed thought it could achieve based on the economy’s pre-COVID-19 performance.
With inflation being such a high priority “over the past couple of years, the Federal Reserve … was behaving like a single mandate central bank,” Bomfim said. “And now we are not just in the transition from hikes to cuts, but also transitioning back to what I would call a more normal state of affairs.”
