With Fed pivot in hand, Powell may opt for broad approach at Jackson Hole By Reuters

By Howard Schneider

JACKSON HOLE, Wyoming (Reuters) – U.S. economic data gave the Federal Reserve the green light to cut interest rates, financial markets lined up for the first move and the central bank nearly gave up on a reading on Wednesday. The July meeting showed that a “large majority” of policymakers agreed that policy easing was likely to start next month.

Yet in place, the focus of Fed Chairman Jerome Powell’s keynote address on Friday at the Fed’s annual Jackson Hole research conference in Kansas City may be less about further shaping expectations and more about assessing the situation in which economy is before what he called a “consequential” first step.

“I don’t think he needs to do much beyond the July press conference,” said Richard Clarida, a former Fed vice chairman who is now a global economic adviser to Pimco, referring to how Powell has leaned heavily toward tapering of the rate at the Sept. 17-18 meeting in remarks to reporters after the July 30-31 meeting.

“You’re not going to get ‘mission accomplished,'” Clarida said, “but they may look back at the last two years, where we’ve been and where we are, and recognize that they’re close” to taming the worst burst of inflation from 40. years.

Powell will take the podium at 10 a.m. EDT (1400 GMT) in a remote cabin in Wyoming’s Grand Teton National Park to address a gathering that has become a global platform for central bank officials to shape views on monetary policy and economy.

With one exception, the six conference speeches Powell has given since becoming Fed chief in 2018 have been largely explanatory, designed less to influence near-term policy expectations than to outline how in which officials were thinking about the major structural problems or, from the beginning, of the COVID-19 pandemic, detailing the mechanics of inflation.

The exception was in 2022, when the Fed struggled to rein in public expectations of high inflation: Powell delivered a terse, market-moving address designed to convey his seriousness about defending the 2 % of the central bank. Some have called it “Volcker’s moment,” a reference to Paul Volcker, the Fed chief who triggered a recession in the early 1980s by punishing interest rates to break an inflationary cycle.

THE REACTION FUNCTION

This is a consequence that the Powell Fed has avoided – until now. Inflation has risen to levels not seen since the Volcker era and two years later is about half a percentage point above target. The unemployment rate, at 4.3%, is well below its long-term average of 5.7%. And financial markets seem in sync with where the Fed is headed.

In light of that, former Fed staffers, policymakers and outside analysts said Powell may well return to his explanatory norm, perhaps outlining in broad terms how the central bank will approach its next easing cycle or analyzing the lessons learned over two years about the causes of inflation. and healings.

The theme of the conference – how monetary policy influences the economy – would fit either.

William English, a former head of the Fed’s monetary affairs division who is now a professor at the Yale School of Management, said he felt the moment called for a general outline of the approach to cutting interest rates.

As Fed policymakers at next month’s meeting update their interest rate forecasts for this year and 2025, Powell will be reluctant to provide detailed guidance on what’s next — a risk in itself for the possible market reaction he could -it triggers or the possibility that future data could push in a different direction.

Instead, Powell could provide a backdrop for the public and markets to understand how the Fed will respond as the economy evolves, English said. “Let’s say the economy doesn’t go the way we expect. What would that mean for politics? . . . What will it take to move faster or slower?”

THE OTHER MANDATE

Powell and other Fed officials have become fond of describing different economic scenarios, a strategy that allows them to provide a basic outlook but also to convey uncertainty about what might happen and how different outcomes might play out. could cause them to react.

Some, for example, began to worry that the economy was at a point where the unemployment rate could rise quickly and high enough to derail the “soft landing” from inflation that they thought was within reach.

However, it’s not clear how the Fed is currently thinking about “full employment” — one of its two goals alongside stable inflation — and the degree to which officials are willing to tolerate rising unemployment in order to it still collects a quarter or half of a percentage point from inflation.

Antulio Bomfim, former special adviser to Powell and now the head of global macro for Northern Trust (NASDAQ:) Asset Management’s fixed income team agreed that the Fed chief will likely eschew short-term guidance in favor of a discussion of broader issues — perhaps trying to capture what the central bank just experienced and how strength will come of work and the dynamics of inflation may differ from the one before the pandemic.

“We’re kind of at an inflection point for politics, potentially for the economy as well. … Inflection points are very difficult to navigate,” Bomfim said.

Open questions remain about the emerging economy, including whether inflation will prove a more persistent headache for central banks after years of pre-pandemic slack and whether labor market dynamics have shifted and could weigh on unemployment rates higher than the Fed thought it could achieve based on the economy’s performance before COVID-19.

With inflation being such a high priority, “for the past two years, the Federal Reserve … has behaved like a central bank with a single mandate,” Bomfim said. “And now we’re not just transitioning from increases to cuts, but transitioning back to what I would call a more normal state of affairs.”