This year’s Jackson Hole symposium has a special feature, as it takes place in the middle of the election season. And the election is undoubtedly a big challenge for independent central banks. This is because the monetary policy makers cannot on the one hand prejudge the outcome, and on the other hand know what the macroeconomic policies will be that will be chosen with the new government that will emerge from the ballot box. And of course they cannot express an opinion on the effects that the proposals included in the pre-election agenda of the candidates may have on the economy.
As Adam Posen, president of the Peterson Institute for International Economics, reports in an article in the Financial Times, when the outcome of an election is uncertain, and the parties have very different positions on fiscal, monetary, trade and regulatory policy, as is the case in the US this at the moment, monetary policy plans should be effective.
Therefore, a sudden policy change in Washington in November could weaken the efforts of the Federal Reserve, which is expected to open its monetary policy easing cycle in September.
Like all central banks, the Fed is loathe to make sharp changes in direction unless there is an obvious shock, such as Covid in March 2020 or the collapse of Lehman Brothers and AIG in September 2008, Posen writes. And he explains that under a Harris or Trump administration, fiscal policy is likely to be relaxed.
However, if Trump wins, the threat of inflation will be greater. Tariffs would rise significantly in a number of countries and industries, adding to inflationary pressures. Large-scale deportation of immigrant workers — as Trump and Republicans are committed to enacting — would be stagflationary, driving up prices due to labor shortages in certain sectors and sharply reducing output.
Overlooking Jackson Hole
Against this backdrop, and with the Federal Reserve already under fire for being slow to open the rate-cutting cycle, markets’ eyes are turning to today’s speech by Jerome Powell at the Jackson Hole symposium. And a bigger issue is what he should say, or – even better – what the markets want to hear.
According to Posen, the US banker should make it clear that the Fed’s monetary policy stance could be reversed after the election, even if it decides to cut interest rates in the coming weeks. It should also make clear to markets and households the economic reality.
Powell has already, bravely and rightly, made statements about the supply-side benefits of immigration. He should reiterate the stagflationary effects of mass deportation and point out that the vast majority of tariffs are paid by US buyers and will therefore fuel inflation. And he should, once again, respond to his role, and speak – as every central banker traditionally does – about the unsustainability of the current fiscal trajectory.
Central bankers around the world are often in a position to criticize any fiscal derailment, even in the face of highly ambiguous elections such as the upcoming US one. And in no case – emphasizes Posen – is this not about influencing the election result or the political choices of an elected president. “This is about being honest with the American people about the risks that monetary policy must face,” he writes in the FT.
Jackson Hole’s Different Dilemma
Federal Reserve Chairman Jerome Powell and his colleagues at the US Fed face a very different dilemma than they did a year ago. Last August the main question was how long it would take for interest rates to remain at two-decade highs to moderate inflation.
This year, as inflation shows new signs of easing and the labor market slows, the question is not whether the central bank will cut interest rates in September, but by how much.
Investors are expecting a first “answer” today during Powell’s speech. He had made it clear on July 31 that a cut of 25 basis points was possible next month, but then played down the idea of something bigger, like 50 basis points.
The look at the Federal Reserve
“We think the time is coming, and if we get the data we hope to get, then a cut in our policy rate could be on the table at the September meeting,” he said.
The tradition of gathering in Jackson Hole began more than four decades ago, when officials from the Federal Reserve Bank of Kansas City chose the spot for their meeting in 1982.
That year, the Kansas City Fed thought the best way to ensure that then-Fed Chairman Paul Volcker would accept the invitation was to combine the event somewhere where he could go fishing in late August. It was widely known that Volker loved the sport.
Decades later, central bankers from around the world, academics, policy makers and journalists still gather in the same place to discuss the economy and monetary policy. The event is held at Jackson Lake Lodge in Grand Teton National Park.
Traditionally, Fed chairmen use their Jackson Hole speech to convey an important, long-term policy message.
Former Fed Chairman Ben Bernanke used his 2010 speech to make an argument that the Fed could jumpstart the economy by buying bonds, a tool also known as quantitative easing (QE).
Powell’s 2018 “Guided by the Stars” speech — perhaps the most memorable of his tenure — outlined how he thought about the natural real interest rate, the rate that neither boosts nor slows growth.
In 2022, Powell in Jackson Hole sent markets plunging after pledging in a shorter-than-standard speech to do whatever it takes to bring inflation back to the central bank’s 2% target, warning that higher interest rates could to bring pain and greater unemployment.
“We will continue until we are sure the job is done,” he had said at the time.
Last August, Powell was once again adamant that the Fed was “ready to raise interest rates further” as he pledged to reduce inflation one way or another. “Although inflation has receded from its peak – a welcome development – it remains very high,” he had stressed.
According to a Yahoo Finance analysis, its tone will likely be significantly different this Friday after more upbeat inflation data boosted expectations for the Federal Reserve.
What some Fed watchers expect from Powell is not a specific forecast for September, but a reminder that the Fed will now pay close attention to employment as the labor market weakens.
“He wants to be very transparent, but I don’t think he honestly knows yet,” comments Wilmer Stith, portfolio manager of bonds at Wilmington Trust. “You’ll probably see them focus more on making sure unemployment doesn’t weaken further.”
Luke Tilley, chief economist at the Wilmington Trust, expects Powell to discuss the natural rate, the rate at which monetary policy neither stimulates nor constrains economic growth.
This measure – also known as the “neutral” rate – helps the central bank understand how restrictive its policy really is.
“A debate about what’s neutral and what’s restrictive would give the Fed an opportunity to say, ‘Hey, we’re going to cut rates, but we want to be clear that we’re just letting off the brake pedal a little bit, no acceleration,'” said Tilley.
Longer wait
However, Fed watchers may have to wait beyond this week to get a more comprehensive picture of what might happen in September. Of particular importance will be the jobs report for August which will be published on September 6.
Any surprise in this report could change the Fed’s calculus and therefore the scope for rate cuts.
Source OT
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