What Will Powell Say at Jackson Hole?
The following is an excerpt from the August 21 Weekly Technical Review
Chair Powell will talk about the progress that has been made on inflation. The CPI has fallen from 9.1% to 3.2% in July, and the headline Personal Consumption Expenditures Index (PCE) is down to 3.0% from 7.0% in June 2022 and the Core PCE has declined from 5.2% in September to 4.1% in June. After noting the improvement Chair Powell will remind everyone that inflation is still well above the FOMC’s 2.0% target. Chair Powell will forcefully reaffirm the FOMC’s commitment to getting inflation down to 2.0%, lest anyone think the FOMC might increase the target from 2.0% to 3%.
The most important part of Chair Powell’s Jackson Hole speech will be what he says will be necessary to get inflation to the FOMC’s inflation target. As it turns out Chair Powell laid out the guidelines in his Jackson Hole speech on August 26, 2022. “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.” In a reflection of how little progress had been made in getting the economy to slow to below-trend growth and exhibiting more softening in the labor market, Chair Powell repeated his comments after the FOMC’s meeting on June 14, 2023. “We remain committed to bringing inflation back down to our 2 percent goal and to keeping longer-term inflation expectations well anchored. Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions. Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run.”
The Congressional Budget Office and the Federal Reserve estimate that the economy’s long term growth potential is 1.9% and 2.0% respectively. Since Chair Powell’s speech last year, GDP hasn’t had a single quarter below 2.0% and has averaged growth of 2.55%.
The Unemployment Rate was 3.7% when Chair Powell spoke at Jackson Hole last year, and in July 2023 it was 3.5%. The labor market remains very tight and well below what the FOMC estimates is the Non-Accelerating Inflation Rate of Unemployment. The NAIRU level for the fourth quarter is 4.4%, which is probably why the Median estimate for the Unemployment Rate in 2024 is 4.5%. In effect, members of the FOMC are saying the Unemployment Rate will need to increase at least above NAIRU for them to have confidence that inflation will fall to near 2.0% and then stay down as slack in the labor market provides a buffer when the economy accelerates.
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This is why the bias of the FOMC is toward increasing the Funds rate at least one more time, as the June Dot plot illustrated. It is also why Chair Powell will say that an additional rate hike is on the table and that every meeting is data dependent and a live meeting. Wall Street will be disappointed to the extent there are hopes that Chair Powell will say something that can be construed to mean the FOMC is done with rate hikes. Chair Powell is likely to emphasize that the FOMC plans to keep the Funds rate at a high level for a long time until the job is done.
Since the FOMC began hiking rates in March 2022 Wall Street has consistently underestimated inflation, the FOMC’s willingness to act aggressively, and the FOMC’s resolve.
Jim Welsh
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