Fed Chair Plays Coy in Jackson Hole

(Photo by Federal Reserve Board of Governors via Flickr)

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Sure, a soft landing may be in sight. But don’t break out the bubbly just yet.

That was the implied message from Party-Pooper-in-Chief, Fed Chair Jerome Powell, at the annual symposium held in Jackson Hole, Wyoming — aka, the hottest, most exclusive party in global fiscal policy. Ultimately, It’s anyone’s guess if the Fed boosts interest rates again; on the other hand, it’s certainly not planning any rate slashes anytime soon.

Ratekeeping

Powell’s highly anticipated Jackson Hole speech is something of a Rorschach test for fiscal policy hawks and doves. While “the lower monthly readings for core inflation in June and July were welcome,” Powell said, “two months of good data are only the beginning… Twelve-month core inflation is still elevated.” Yes, “GDP growth has come in above expectations and above its longer-run trend,” he added. But “persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.”

Powell’s bottom line: “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.” But even then, the Fed chair tempered expectations, vowing to “proceed carefully” with future rate hikes.

What does that mean for the Fed’s meeting next month? The smart money is on a pause:

  • Traders in interest-rate futures markets have pegged the probability of a rate hike at the September meeting at nearly 20%, according to CME Group’s Fedwatch tool, marking a roughly 10% uptick from predictions just a week prior.
  • Those traders also have assigned a 54% chance to one more hike by the end of the year, though they’re also predicting a better-than-50% chance that rates are slashed from the current two-decade-high by next summer.

Value-Neutral: Once the Fed achieves its 2% inflation goal, an even bigger question looms: Where will rates ultimately settle, and how will the Fed calculate the “neutral rate” — the level at which fiscal policy neither stimulates nor restricts economic growth. A Fed schism has already formed. While some, like New York Fed President John Williams, estimate that the neutral rate will eventually settle around the ultra-low levels seen prior to the pandemic, others, like Richmond Fed President Tom Barkin, see today’s economic growth amid record-high rates as proof that pre-pandemic rates would be far from neutral. Powell, in his speech, already weighed in: “We cannot identify with certainty the neutral rate of interest, and thus there is always uncertainty about the precise level of monetary policy restraint.” Hawks and doves, make of that what you will.