Why Jay Powell should be bold in Jackson Hole
Federal Reserve Update
Sign up for myFT Daily Digest and be the first to learn about the Fed news.
The author is the president of Queen’s College, Cambridge University and an advisor to Allianz and Gramercy
The Fed chairman usually convenes the annual meeting of central bank governors in Jackson Hole, Wyoming, in one of two ways. Either fly under the radar screen of the market or provide some compelling policy announcements.
If i wouldn’t be surprised Jay PowellIn the keynote speech this week, he chose the former. Some people may even think that this is a more risk-averse option. That would be unfortunate. The well-being of the economy, the Fed, and the financial market requires Powell to take the latter path. This is also a less risky option.
It is natural for the Fed chairman to vacillate on how to deal with Jackson Hole’s statement.Choose a low-key approach suitable for the seminar Stated intention Bring together “economists, financial market participants, academics, U.S. government representatives, and the news media to discuss long-term policy issues of common concern.” However, in the case of all attendees and media coverage, it may also be appropriate to spice things up by signaling upcoming policy changes.
Ben Bernanke did an unforgettable thing in 2010, previewing the expanded use of unconventional policies to pursue a wide range of economic goals, not just to calm turbulent, dysfunctional financial markets.
Powell has Signal repeatedly He prefers slow and delicate policy evolution. This is consistent with the still uncertain economic outlook and employment deficit. This seems to minimize the risk of major market turmoil, especially after the experience in 2013 and 2018.
There is also a lot to say about the long-term view on this year’s theme “Macroeconomic Policy in an Unbalanced Economy”. Inequality in income, wealth, and opportunity continues to worsen; the threat of climate change is multiplying, and growth performance around the world has become more fragmented. Now is the time for central bank officials to express more opinions on the role they can and should play in ensuring more inclusive and sustainable economic growth.
Despite the importance of these topics, there are still quite a few people waiting to hear what only Powell can provide-when and how the Fed will get rid of the Covid-related emergency measures taken at the beginning of the pandemic. Recent economic data underscores the need to clarify this point.
Regarding the Fed’s two mission objectives, employment and inflation, The central bank has been closer to satisfying one but surpassing the other. As risky assets continue to decouple from fundamentals, setting new records, and heightening concerns about future disturbing market volatility, its third, more informal market stability goal is worryingly pending.
Recent employment reports indicate that the labor market is improving at an accelerating rate. The unemployment rate fell by 0.5 percentage point to 5.4% in July; the employment-to-population ratio and labor force participation rate rose slightly; nearly 1.9 million jobs were created in June and July. Job vacancies have risen to a record 10 million. Unsurprisingly, the respected Harvard economist Jason Furman (Jason Furman) Say on twitter: “I haven’t found any flaws in this employment report. I have never seen such wonderful economic data before.”
However, inflation concerns have not yet dissipated. Although the consumer price index did not rise in July, overall interest rates remained at 5.4% and core (excluding food and energy) 4.3%. But the PPI, which tracks producer prices, rose more than expected, reaching worrying levels of 7.8% and 6.1%, respectively.
It’s no wonder that many companies use earnings reports released earlier this month to foretell that costs and prices will rise in the future. Most of these occurred before the new round of supply disruptions because of the surge in Delta mutation infections and hospitalizations, disrupting the cross-border supply chain.
Employment and inflation data have led more members of the Federal Open Market Committee to publicly support the Fed’s earlier reduction of its $120 billion monthly asset purchases. In contrast, Powell has not yet shaken off his often repeated preference, that is, to maintain these large-scale liquidity injections for a longer period of time. Naturally, investors and traders are more willing to take comfort from the firm dovish voices of the only voice that matters to them-Powell and his two closest senior colleagues. Richard Clarida with John Williams.
The longer Powell waits to elaborate on his ideas, the greater the challenge of maintaining Fed unity, and the greater the risk that the central bank will be forced to slam policy brakes more disorderly.
Therefore, his highly anticipated speech at Jackson Hole on August 27 was a valuable opportunity for him to regain his policy narrative. In fact, not doing so is riskier than the seemingly easier avoidance option—for the economy, financial stability, and the reputation of the world’s most powerful central bank.