Global markets were focused on US Federal Reserve (Fed) Chairman Jerome Powell's speech at the Jackson Hole Economic Policy Symposium, which will start on 25 August and last for two days. The symposium, which brings together the most important central bankers and financial market participants from all over the world every year in Jackson Hole, Wyoming, USA, this year's theme was announced as "Structural Changes in the Global Economy".
In his speech at the Federal Reserve Bank of Kansas City's annual Jackson Hole Economic Policy Symposium in Wyoming on 25 August, Fed Chairman Jerome Powell pointed out that inflation remains high, although they are optimistic about inflation coming down. "We are paying attention to signs that the economy is not cooling as expected," Powell said.
Powell emphasised that they are ready to raise interest rates when necessary and intend to keep their policies at a restrictive level until they are sure that inflation is moving towards the target level in a sustainable way. "It is the Fed's job to bring inflation down to our 2% target and we will do that," Powell said. Powell also said in his speech, "In the coming meetings, we are in a position to proceed carefully in assessing incoming data, the evolving outlook and risks, and we will decide whether to tighten further or instead hold the policy rate steady and wait for more data." Noting that recent data show that there is a "long way ahead", Powell stated that the ongoing period of high inflation was initially caused by the collision between very strong demand and limited supply due to the pandemic. Powell underlined that sustainable progress is needed and restrictive monetary policy is needed to ensure this progress.
Powell ended his speech with the following sentence he used to end his speech at last year's Jackson Hole meeting, which was seen as an aggressive stance against inflation: "We will continue until the job is done."
Powell's speech emphasised one main point. Namely, Fed officials want to see more progress in order to be convinced that price increases are really under control. Price increases have fallen significantly in recent months to around 3% according to the Fed's benchmark. While this is still higher than the Fed's 2% inflation target, it is a sharp decline from last summer's peak of 7%. Markets have become more optimistic that the Fed will achieve a hard "soft landing" that will bring inflation down to its target level without triggering a severe recession. According to the CME FedWatch Tool, investors see a roughly 85% chance that the Fed will keep interest rates unchanged at its next meeting in September.
Powell's counterpart at the European Central Bank, Christine Lagarde, made a similar point about the Euro economy and global policy in a separate speech at the Jackson Hole conference; however, the uncertainties highlighted by Lagarde were more long-term.
How was Powell's speech evaluated?
Commenting on Powell's speech, Laura Rosner-Warburton, Senior Economist at MacroPolicy Perspectives, said, "I think this paves the way for a pause at the September meeting and leaves options open afterwards. We are close to the summit, we may be there and they will move carefully." Omair Sharif, Chief Economist of Inflation Insights, said in a statement regarding Powell's speech, "When it comes to a new rate hike, the President's finger is still on the trigger, albeit a little dimmer than last year." "He is still very concerned about how fast the economy is growing because it means that, all things being equal, we need higher interest rates just to be restrictive," said KPMG's Chief Economist Diane Swonk.
What did the Fed do in the past meetings?
The first Fed interest rate meeting of 2023 was held on 31 January and 1 February. At the first FOMC meeting of 2023, the Fed raised the policy rate by 25 basis points in line with expectations. On 22 March, the Fed raised the policy rate by 25 basis points to 4.75-5% in line with expectations, while at its meeting in May, the Fed raised the policy rate by 25 basis points to 5-5.25%, the highest level in 16 years. The Fed did not raise interest rates in June with a "pass". In July, the Federal Open Market Committee raised the policy rate by 25 basis points to 5.25-5.50%, the highest level in 22 years. The minutes of the Fed's last meeting were released on Wednesday, 16 August 2023. In the minutes, it was noted that upside risks to inflation continued, which may require further rate hikes. Indeed, the minutes revealed that most Fed officials continue to see significant upside risks to inflation that may require further tightening of monetary policy. Noting that Fed officials stated that inflation remains "unacceptably high" despite recent declines, the minutes emphasised that more evidence is needed to ensure that inflation is moving towards the target. The Fed increased the rate of inflation by 75 basis points 4 times last year, and continued with 50 basis points in December 2022, slowing the rate of increase.