Jackson Hole Fed Preview: A Cast Of Inflation Hawks - Forbes

Over this 11-year period, the effects of subdued inflation rippled throughout the economy. The Federal Open Market Committee's (FOMC) ... SelectRegion UnitedStates UnitedKingdom Germany India Youmightbeusinganunsupportedoroutdatedbrowser.TogetthebestpossibleexperiencepleaseusethelatestversionofChrome,Firefox,Safari,orMicrosoftEdgetoviewthiswebsite. advisor Investing AdvertiserDisclosure JacksonHoleFedPreview:ACastOfInflationHawks TaylorTepperForbesAdvisorStaffFactCheckedBenjaminCurryeditorFactCheckedUpdated:Aug18,2022,12:20pm EditorialNote:WeearnacommissionfrompartnerlinksonForbesAdvisor.Commissionsdonotaffectoureditors'opinionsorevaluations. Getty EveryAugust,theFederalReserveBankofKansasCityinvitescentralbankers,academicsandeconomistsfromaroundtheworldtoattenditsannualeconomicpolicysymposiuminJacksonHole,Wyo. AtthepasttwoJacksonHoleFedmeetingsoftheCovid-19era,FedChairJeromePowellofferedcalmingwordsaboutinflationandthestateoftheeconomy.HestressedtheFed’sroleinhelpingtheU.S.economyrecoverfromtheCovidcrisis,andreassuredmarketsthatthecentralbankwouldkeepinterestrateslowandbondpurchaseshigh. Withinflationhotterthanit’sbeeninfourdecades,thisyear’sspeechshouldbeverydifferent. “Whatitshouldbeis‘Wescreweduponinflation,’butI’mnotwritinghisspeech,”saidMorganHill,chiefexecutiveofHill&HillFinancial.“There’sa3–alarmfiretoputout.” Butmorethanmeaculpas,marketswantinsightintohowdedicatedtheFedremainsinitscrusadeagainstrisingprices,especiallyaspartsoftheU.S.economyareshowingsignsofweakness. Ahawkishspeechcouldhelpunwindthestockmarketgainswe’veseensinceJuly.Onethathintsatapauseonratehikesorsimplytakesadovishtonecouldimpedetheeconomy’sprogresstowardspeakinflation. Let’slookbackatPowell’slasttwoJacksonHoleperformancestoseejusthowmuchtheFed’sinflationstancehasevolvedsince2020. 2020JacksonHole:MoreInflation,Please Inflation:HeadlineCPI1.3%,CorePCE1.5% UnemploymentRate:8.4% TotalEmployment:141million,about11.5millionfewerthaninFebruary2020 InAugust2020,Covid-19caseswereclimbing,lockdownswerestillinplaceandvaccineshadyettobeapproved.TheJacksonHoleconferenceandPowell’sspeechwasaremoteaffair. Thereweresomeotherbigdifferencesaswell. TheCovidcrisismarkedtheendofadecadewheninflation—asmeasuredbythecorepersonalconsumptionexpendituresindex(PCE),theFed’spreferredyardstick—wasconsistentlybelowtheFed’s2%target.BetweenFebruary2009andFebruary2020,therewereonly10monthswhenannualcorePCEinflationroseabove2%. Overthis11-yearperiod,theeffectsofsubduedinflationrippledthroughouttheeconomy.TheFederalOpenMarketCommittee’s(FOMC)estimateoftheneutralfederalfundsrate—whenthiskeyinterestrateisneitherstimulatingtheeconomynorholdingitback—droppedfrom4.25%inearly2012to2.5%inAugust2020. TheFedhadalsorealizedthataftertheGreatRecession,theU.S.economycouldhandlemuchlowerlevelsofunemployment—ithaddroppedto3.5%inFebruary2020—withoutinflationgettingoutofcontrol.Inearliereras,lowunemploymentoftenprovokedrisingpricesfromwagegains. “Thepersistentundershootofinflationfromour2%longer-runobjectiveisacauseforconcern,”saidPowellinhis2020JacksonHolespeech. PowellandcompanywantedtoletmarketsknowthattheFedwasproperlyconcernedaboutinflationrunningbelowtarget.AtJacksonHole,heannouncedasubtlechangeintheFed’smonetarypolicystrategy. “Monetarypolicywilllikelyaimtoachieveinflationmoderatelyabove2%forsometime,”hesaid.Whilethismighthaveseemedlikeaminortweak,itwouldenduphavingmajorimplications. PowellarguedthatlettinginflationrunabithotterwouldnudgepeopleawayfromassumingthattheFOMCshouldraiseinterestratesassoonasinflationhit2%. Atthetime,thisnewapproachmadeagreatdealofsense.Afterall,inflationhadbeenmuchlowerthandesiredforquiteawhile.Plus,theCovidRecessionandpandemiclockdownshadputalidonpricegrowth. 2021JacksonHole:InflationIsTemporary Inflation:HeadlineCPI5.2%,CorePCE3.6% UnemploymentRate:5.2% TotalEmployment:147million,about4.5millionfewerthaninFebruary2020 TheKansasCityFedhadplannedanin-person2021JacksonHolesymposium,buttheDeltavariantofCovid-19forcedthemtoholdavirtualevent. Thatwasn’ttheFed’sonlysurpriseof2021. TheNationalBureauofEconomicResearch(NBER)hadjustannouncedthatthebriefbutdevastatingCovidRecessionwasover.Theunemploymentratehaddroppedfromnearly15%attheonsetofthepandemicto5.2%inAugust2021. TwomassivestimulusbillshadlinedthepocketsofAmericanconsumerswithcash,andpeoplewerespending.Surgingdemandjammedupportsandcausedsuppliesofcertainmanufacturedgoods,likeautomobiles,toskyrocket.MoneyflowedintomemestocksandBitcoin. InflationwasnolongerbelowtheFed’s2%target.Farfromit.CorePCEhadshotuptoanannualizedrateof3.6%inAugust2021,comparedtojust1.8%onlyafewmonthsearlier. Throughoutearly2021,Fedofficialshadinsistedthatrisingpriceswere“transitory.”WithmillionsofAmericansstilloutofworkandthetasteoflastyear’snewinflationpolicystillfreshinitsmouth,theFedwashesitanttopumpthebrakesonaneconomythatneededfurtherconvalescing. PowelldidnotabandontheFed’spartylineontransitoryinflationinhisJacksonHolespeech. “Labormarketconditionsareimprovingbutturbulent,andthepandemiccontinuestothreatennotonlyhealthandlife,butalsoeconomicactivity,”Powellsaid.“Manyotheradvancedeconomiesareexperiencingsimilarlyunusualconditions.” Hereasonedthathigherpriceswouldrecedesoonerratherthanlater.Tobackuphispoint,Powellcitedfiveclaimsregardinginflation: Pricegainswereconcentratedinjustafewgoods. Thesesuddenlyexpensivepriceswerealreadymoderating. Littleevidenceexistedtosuggestwageswerepushingupinflation. Longer–terminflationexpectationswereundercontrol. Pre-pandemictrends—globalization,anagingpopulationandtechnologicaladvancements—werestillineffect. WhilePowell’scasemadesenseatthatmoment,theFedwasovertakenbysurginginflation.Fourratehikeslater,theFOMChasincreasedthefedfundsrateto2.25%to2.5%from0.25%to0.50%. 2022JacksonHole:TooMuchInflation Inflation:HeadlineCPI8.5%,CorePCE4.8% UnemploymentRate:3.5% TotalEmployment:152.5million,about32,000morethaninFebruary2020 TheFed’stransitoryinflationnarrativelooksparticularlyhollowfromtheperspectiveofAugust2022. InJuly2022,inflationhasspreadwellbeyondjustafewcategories,likecars.Foodisnearly11%higheryearoveryear,whilegasolineisup44%.Meanwhile,significantbalancesheetitemslikehousing(+5.7%),transportation(9.2%)andmedicalcare(5.1%)allgainedinpriceyearoveryear. Wagesareup6.7%,accordingtotheAtlantaFederalReserveBank’swagegrowthtracker,whichisalmostthreepercentagepointshigherthanwhenPowellmadehisill-fatedpredictionjustayearago. That’scoldcomforttomanyworkerswho’veseeninflation–adjustedearningsfallby3%overthepastyear. Whilelonger–terminflationmeasurementsremainlow,macroeconomictrendshavebetrayedtheFedaswell.Thenation’spopulationisstillgraying,tobesure,buttheRussianinvasionofUkraineearlierthisyearhasseverelyimpactedenergyprices,whichdriveallsortsofinflation. MarketobserversexpecttheFedtocontinuetheirhawkishtoneatJacksonHolethisyear. “Theywanttomakeitclearthatthey’recommittedtoreducinginflation,”saidWellsFargoSecurity’schiefeconomistJayBryson.“Itdoesn’thavetohappenthisyearandmaybenotnextyear,buttheywantinflationexpectationssomewherearound2%.” WhilethemostrecentCPIreportshowedinflationmoderatingsomewhatfromitspriorhighs.Pricesrose9.1%yearoveryearinJune,butonly8.5%inJuly.TheslightlylesshotJulyreadingwasdrivenbysomewhatlowerenergyprices. CorePCEinflationinJunewas4.8%,morethandoubletheFed’stargetrate.Notethatmeasuresofcoreinflationexcludevolatilefoodandenergyprices. “TheFedissolelyfocusedonnothavinginflationembeddedineconomy,”saidJRGondneck,managingpartneratTheLernerGroupatHightowerAdvisors. Therefore,expectPowelltoreiteratehisdedicationtohigherinterestrates,evenasGDPhasbeenintheredforthefirsthalfof2022.Aftermissingoninflationsobadlylastyear,theFedwillnotwanttorepeatitsmistaketoday. Wasthisarticlehelpful? Shareyourfeedback Sendfeedbacktotheeditorialteam RatethisArticle ★ ★ ★ ★ ★ Pleaseratethearticle Email Pleaseentervalidemailaddress Comments We'dlovetohearfromyou,pleaseenteryourcomments. Invalidemailaddress Submit ThankYouforyourfeedback! Somethingwentwrong.Pleasetryagainlater. BestOfs BestInvestmentApps BestRobo-Advisors BestCryptoExchanges BestCryptoStakingPlatforms BestOnlineBrokers BestMoneyMarketMutualFunds BestInvestmentPortfolioManagementApps BestLow-RiskInvestments BestFixedIncomeInvestments Basics WhatIsInvesting? WhatIsABrokerageAccount? WhatIsABond? WhatIstheP/ERatio? WhatIsLeverage? WhatIsCryptocurrency? WhatIsInflation&HowDoesItWork? WhatIsaRecession? WhatIsForexTrading? 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