Powell has a chance to reset market expectations in Jackson Hole

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Federal Reserve Chairman Jerome Powell will have an opportunity — if he wants to take it — to restore expectations in financial markets when central bankers gather this week for their annual Jackson Hole retreat.

Powell talks about the economic outlook at 10 a.m. Washington time on Friday and is expected to reiterate the Fed’s determination to keep raising interest rates to get inflation under control, although it will likely stop short of signaling how key officials will fare when they meet next month.

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

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

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

US stocks have rallied since the Fed’s last meeting in late July, amid growing expectations that the central bank will begin to slow the pace of tightening and signs that inflationary pressures may be easing.

Investors have largely been unfazed by policymakers’ strong assertions along the way that their fight against inflation is far from over, although the president himself has yet to speak since his post-meeting news conference on 27 July.

This year’s conference is being held in person for the first time since 2019. Last year, it was moved to a virtual format a few days early 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 speech at the forum, Powell stressed that those pressures would likely prove transitory and did not appear broad-based.

Now, a year later, inflation is near four-decade highs, and Powell admitted that the Fed’s analysis was flawed and that policymakers should have started raising rates sooner.

Given that backdrop — despite the latest monthly consumer prices report inspiring some optimism that inflation may have peaked — Powell will likely take a hard line, said Kevin Cummins, chief U.S. economist at NatWest Markets in Stamford. of Connecticut.

“They’re so focused on doing this in part just because they screwed up last year with the whole ‘transient’ thing, and they realize the only thing they can do now is tighten policy and that will slow inflation,” he said Cummins.

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

For now, investors see similar odds for either a half-point increase or another three-quarter hike at the Fed’s Sept. 20-21 meeting. August jobs and consumer price numbers are expected to be released by the Labor Department before then, and will likely be the deciding factor in which Fed officials choose.

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

As the only member of the Executive Council attending this week’s conference, Schnabel will speak from a position of authority. Her remarks during a panel on the “post-pandemic policy outlook” may shed light on how the ECB plans to deal with short-term challenges such as stubbornly high price pressures and a weakening economy with long-term include climate change.

Short-term aside, the big question is how high the Fed and its bondholders around the world will ultimately get interest rates.

Kansas City Fed President Esther George, whose bank hosts the annual Jackson Hole symposium, said Thursday that either policymakers opt for another big hike next month or begin to taper down to smaller ones, perhaps need to keep raising rates for a while until they are “absolutely convinced” that inflation is moving down.

“How high are you raising rates? I don’t think we’ll ever find out. We’re not going to know until we start seeing how some of these variables come together — how the supply and demand pieces play out — to know exactly where that tipping point is,” George said. “But I think, as you have heard others say, we should be very clear that we should be absolutely convinced that this number is going down.”

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