Powell Has Chance to Reset Market Expectations at Jackson Hole

(Bloomberg) — Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Most Read from Bloomberg

Federal Reserve Chair Jerome Powell will have a chance — if he wants to take it — to reset expectations in financial markets when central bankers gather this week at their annual Jackson Hole retreat.

Powell speaks on the economic outlook at 10 a.m. Washington time Friday and is expected to re-state the Fed’s resolve to keep raising interest rates to get inflation under control, though he’ll probably stop short of signaling how big officials will go when they meet next month.

“That’s everyone’s top-of-mind question: How much will Powell micro-manage financial conditions? We have reached a point where the economy is showing signs of slowing,” said Laura Rosner-Warburton, a senior US economist at MacroPolicy Perspectives in New York. “If we don’t see more slowing in the data and instead things bounce, then the Fed will have to more actively manage financial conditions.”

Powell’s speech will mark the highlight of the two-day conference in Wyoming’s Grand Teton mountains. The prestigious event, which in the past has been used by Fed chairs as a venue for making key policy announcements, brings together top policy makers from around the world.

European Central Bank Executive Board member Isabel Schnabel speaks on a panel Saturday. Bank of England Governor Andrew Bailey will be among those present, but ECB President Christine Lagarde doesn’t plan to attend.

US stocks have rallied since the Fed’s last policy meeting in late July amid growing expectations that the central bank will begin slowing the pace of tightening, as well as signs that inflationary pressures may be moderating.

Investors have been mostly unfazed by strident assertions from policy makers along the way that their fight against inflation is far from over, though the chair himself has yet to speak since his July 27 post-meeting press conference.

This year’s conference is being held in-person for the first time since 2019. Last year, it was moved to a virtual format just days in advance as the delta variant of Covid-19 swept across the country. Inflation had by then risen well above the Fed’s 2% target, but in his address to the forum, Powell emphasized that those pressures would probably prove transitory, and didn’t seem broad-based.

Now, a year later, inflation is near the highest levels in four decades and Powell has conceded that the Fed’s analysis was incorrect and policy makers should have begun raising interest rates sooner.

Given that backdrop — despite the latest monthly report on consumer prices fanning some optimism that inflation may have peaked — Powell will probably stick to a hard line, said Kevin Cummins, the chief US economist at NatWest Markets in Stamford, Connecticut.

“They are so focused on doing this partly just because they screwed up last year with the whole ‘transitory’ thing, and they realize that the one thing they can do now is tighten policy, and that will slow inflation,” Cummins said.

The Fed raised its benchmark interest rate by three-quarters of a percentage point at its July policy meeting, following an increase of the same size the month before. The back-to-back moves marked the fastest pace of tightening since the early 1980s.

At the moment, investors see similar odds to either a half-point or another three-quarter point hike at the Fed’s Sept. 20-21 gathering. August numbers on jobs and consumer prices are due out from the Labor Department before then, and will probably be the determining factor in which option Fed officials choose.

In Europe, policy makers are having a similar debate over how big the next rate hike should be. The ECB is trailing its peers in responding to record inflation and only just started raising rates in July. Following last month’s half-point increase, many policy makers have yet to signal whether they ae leaning toward another such step in September or a smaller, quarter-point move as recession risks mount.

As the only Executive Board member in attendance at this week’s conference, Schnabel will speak from a position of authority. Her remarks during a panel about the “outlook for policy post-pandemic” may shed light on how the ECB plans to juggle short-term challenges such as stubbornly high price pressures and a weakening economy with longer-term ones that include climate change.

Beyond the near term, the big question is how high the Fed and its counterparts around the world will eventually take interest rates.

Kansas City Fed President Esther George, whose bank hosts the annual Jackson Hole symposium, said Thursday that whether policy makers opt for another big hike next month or start down-shifting to smaller ones, they may have to keep raising rates for a while, until they are “completely convinced” inflation is headed lower.

“How far do you raise rates? I don’t think we are going to know. We’re not going to know until we begin to see how some of these variables come together — how the supply and demand pieces unfold — to know exactly where that stopping point is,” George said. “But I think, as you’ve heard others say, we will have to be very clear that we will have to be completely convinced that that number is coming down.”