Fed Chair Jerome Powell’s keynote address at the Kansas City Fed’s Jackson Hole conference on Friday may focus less on altering market expectations and more on evaluating the current economic situation ahead of this significant policy shift.
Richard Clarida, a former Fed vice chair and current global economic adviser for Pimco, noted that Powell has already signaled a strong inclination toward a rate cut in his July remarks. Clarida suggested that Powell might reflect on the Fed’s progress over the past two years and acknowledge their proximity to addressing the highest inflation in 40 years.
Powell will speak at 10 am EDT (1400 GMT) from a remote lodge in Grand Teton National Park. The Jackson Hole conference has become a major forum for central bank leaders to shape monetary policy views and discuss the economy.
Out of the six speeches Powell has delivered at this conference since becoming Fed chair in 2018, most have been explanatory, focusing on major structural issues or inflation mechanics, rather than short-term policy influence. The exception was his 2022 address, which was more forceful and aimed at reinforcing the Fed’s commitment to its 2% inflation target, reminiscent of Paul Volcker’s tough stance in the 1980s.
Despite high inflation levels not seen since the Volcker era, the Powell Fed has avoided a recession, with inflation now roughly half a percentage point above target and unemployment at 4.3%, below its long-term average. Financial markets seem aligned with the Fed’s direction.
Former Fed staff and analysts suggest Powell may revert to his usual explanatory role, providing a broad overview of the Fed’s approach to the upcoming easing cycle and discussing lessons learned about inflation over the past two years. The conference theme, which examines the impact of monetary policy on the economy, aligns with this approach.
William English, a former Fed monetary affairs division head and current Yale professor, believes Powell should outline the Fed’s rate-cutting approach while avoiding detailed forward guidance, which could provoke market reactions or be disrupted by new data.
Powell might also discuss various economic scenarios, explaining how different outcomes could affect Fed policy. This approach allows the Fed to provide a baseline outlook while acknowledging uncertainty and potential changes in response to economic developments.
There are concerns that rising unemployment could hinder the Fed’s ability to achieve a “soft landing” from inflation. The Fed’s stance on “maximum employment,” one of its dual goals alongside stable inflation, and its tolerance for higher joblessness to further reduce inflation remain unclear.
Antulio Bomfim, a former adviser to Powell and current head of global macro at Northern Trust Asset Management, predicts Powell will focus on broader issues rather than short-term guidance. Bomfim suggests that the Fed may be navigating a critical policy transition, reflecting on recent experiences and the evolving dynamics of labor and inflation.
The transition from interest rate hikes to cuts signifies a return to a more typical policy stance after focusing primarily on inflation in recent years, marking a shift towards addressing broader economic conditions.
