A year ago, Federal Reserve Chairman Jerome Powell sent financial markets into a tailspin when he promised in a short but dramatic speech at Jackson Hole that the US central bank would get inflation under control regardless of economic problems. This led to a brief stock market spike, followed by a sharp fall in indices. The US 30, for example, fell by more than 14% before bottoming out in October 2022.
Twelve months later, US inflation has actually fallen from 9% to 3%, while the economy continues to grow and unemployment remains at record lows. Equity indices have also rebounded. The Fed appears to be on track to bring price growth back to its 2% annual target, while avoiding the recession it keeps warning about.
Fed's Jackson Hole meeting in focus this week
Economic headwinds are intensifying as tighter monetary policy begins to bite while inflation remains above the Fed's target.
Investors will be looking to the Jackson Hole Symposium to get a better idea of the Fed's strategy going forward, as this is usually where the stage is set for the months ahead. Since the inception of the Jackson Hole Symposium in the 1980s, every Fed chair has delivered a speech at Jackson Hole, often using the opportunity to deliver a message or set out a new policy framework. For Jerome Powell, this year's speech will provide a platform to clarify his views on future Fed policy without revealing the exact steps. It will give him the opportunity to delve deeper into the thinking of Fed officials. The question is how cautious he will be.
What's next for the US economy?
A repeat of last year's speech is unlikely, mainly because the outlook is less clear today than it was a year ago. It will be important for Powell to strike a sufficiently balanced tone so that even hints of progress so far are not misinterpreted by market participants as a signal of imminent rate cuts.
The challenges facing the Fed in the months ahead are immense. It is clear that bringing inflation back to the 2% target range will be much more difficult. An important component of this is the calculation of inflation and the base effect that occurs.
Headline inflation figures reflect year-on-year comparisons. As price increases accelerated in the spring and summer of 2022, this year's inflation data pointed to a sharp slowdown. However, now that the July 2022 inflation peak has passed, year-on-year comparisons may no longer be as favourable. This could mean that inflation rates will move more or less sideways in the coming months.
New normal for the Fed?
The Fed will also be concerned about the economic outlook after the end of the current inflation cycle. The concern is that this cycle may be more inflationary than others because of systemic changes in the global economy that could last for years. For example, efforts to rebalance domestic supply chains and decouple global economies are likely to have lasting inflationary effects. Given these and other political and economic developments, there are concerns that the Fed may find it increasingly difficult to bring interest rates back to pre-crisis levels.
The main theme of this year's Jackson Hole conference, "Structural Shifts in the Global Economy", suggests that much of the discussion - and perhaps even Powell's speech - will focus on the idea of higher inflation in the long run. This is likely to be just the beginning of a discussion that central bankers will be having for years to come.
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