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What Wall Street Expects to Hear from the Federal Reserve in Jackson Hole

Inflation talk is expected to dominate the Federal Reserve’s annual summer meeting in Jackson Hole, Wyoming, later this week.

Wall Street will closely follow the Jackson Hole Economic Symposium – which will return to a face-to-face format after two years of virtual holding – for clues as to where the Fed might go in its attempts to tame rising prices.

“It’s interesting how this August speech by the Fed Chairman in Jackson Hole has become such an important platform for the Fed to influence market expectations about policy. It becomes a self-fulfilling prophecy,” said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution.

The title of this year’s symposium, which starts on Thursday and runs through Saturday, is “Reassessing constraints on the economy and politics.” Inflation will certainly be the hottest, though not the only topic discussed, and nearly every word published or spoken will be scrutinized by traders and analysts for any hint of what it might indicate about the central bank’s policy trajectory.

Of particular interest to market participants is Fed Chair Jerome Powell’s keynote address on Friday morning.

“[Esses discursos são] much more solid than the usual political discourse, so there’s a lot more to chew on,” said Kenneth Kuttner, an economics professor at Williams College.

Wall Street Wants Assurances – But Not Too Much

Whether the market will get the wellness story it wants, or comments that throw cold water on those hopes, is an open question — and much debated.
“What they expect to hear from Jay Powell is that the Fed will act to reduce inflation, but will be confident enough that it can reverse course early next year. I don’t think they’re going to hear that,” Randall said. Kroszner, former Fed governor and vice dean of executive programs and professor of economics at the University of Chicago Booth School of Business.

Instead, he said the Federal Reserve hopes that by raising interest rates quickly, it won’t have to raise them too much. “If that’s the case, they can avoid a significant downturn, but that’s not guaranteed,” he said.

The Fed has to stick the needle in policy moves as well as in the way it communicates those intentions. Powell can trigger Wall Street angst if he sounds too hawkish — or not enough.

“I think what Powell will try and do is continue his narrative about fighting inflation while trying to dissuade the market from the notion that the Fed has made a dovish pivot,” said David Norris, partner and head of U.S. credit at TwentyFour Asset. Management. “I don’t think he’s going to surprise the markets with his statements,” he said.

“The Fed’s calls so far have been relatively easy,” Wessel said, adding that there isn’t a lot of guesswork involved when interest rates are near zero percent, unemployment is hitting five-decade lows and inflation is rising.

But going forward, weighing the risk-reward tradeoffs will become more challenging — and the stakes will get higher — as initial rate hikes begin to produce results that cool the economy.

“At some point, they’re going to have to decide, ‘Have we done enough?’ and they are always close, and at that point, they will have to decide which risk is more serious – the risk of doing too much and causing a recession or the risk of doing too little and incorporating inflation into the economy,” Wessel said. “My instinct is that they will err on the side of doing too much.”

Former Treasury Secretary Lawrence Summers said the Fed needs to project an aggressive stance on inflation and is urging Powell to use his Jackson Hole speech to chart a path of “restrictive” monetary policy. “My worst fear would be that the Fed keeps suggesting it can have it all in terms of low inflation, low unemployment and a healthy economy,” he said on Bloomberg TV over the weekend.

Powell’s words may come back to haunt you

At the Jackson Hole economic summit last year, Powell argued that inflation would not last — a forecast that has not aged well and that economists feared would tarnish the central bank’s credibility.

At the time, he claimed that inflation was confined to a discrete set of goods and services and blamed rising prices for the widespread shift in spending as Americans bought all kinds of goods instead of spending money on services. “From long experience, we expect the inflationary effects of these increases to be transitory,” he said at the time.

On the same day Powell spoke at last year’s symposium, the Commerce Department announced that the Fed’s preferred measure of inflation, the personal consumption spending index, had risen 4.2% over the year, the sharpest increase since January 1991.

“He also talked at length about inflation and made a long argument that turned out to be… not so good in hindsight,” Kuttner said. “Mistakes are always evident in hindsight.”

“Maybe this time he’ll make a call about the likelihood of a recession,” he said. “I think he almost has to say that there will be no [um]. There’s a good chance he’s wrong about that.”

Kroszner said a similar misstep to the prediction that “inflation is transient” this time would be if the Fed communicated an upbeat sentiment about the labor market that turned out to be unfounded – an outcome he said was likely. While the current unemployment rate is an ultra-low 3.5%, it would be a mistake to take that for granted, he said, predicting that job losses are likely to increase.

“I think they can be very optimistic about what can happen with the unemployment rate. Even if we don’t have a full-blown recession, I don’t see how we can keep the unemployment rate at just 4% and inflation fall – and quickly fall to 2% – with an unemployment rate peaking just slightly above its long-term average. term,” he said.

It’s possible, Kroszner added, that Powell adopts the same kind of overly optimistic outlook that kept the Fed from reversing its support for the economy in the pandemic era, even as price increases were picking up.

Supply issues, fiscal policy will also likely be addressed

Fed observers pointed out that the central bank’s usual tools to combat high prices are limited in the current economy because both demand and supply imbalances are contributing to the price spiral.

“I think you will hear widely about supply chain disruptions,” Kroszner said, but expressed skepticism that Fed policymakers fully appreciate the extent to which these disruptions have affected the economy. “We have to take anything positive there with a grain of salt,” he said.

Kroszner said government spending could also be addressed. “My hunch is that there will be some people thinking about fiscal issues – this is not directly in the Fed’s control, but the Fed takes that into account,” he said.

Even with the trillions of dollars in pandemic-related spending added to the US debt burden, paying for it hasn’t weighed heavily on the economy so far, he pointed out — but that dynamic could be at a tipping point, with potentially serious consequences for the economy. economic growth in the future.
“Service on that debt will be a much bigger burden, so there may not be as much fiscal space available to respond if there is a significant economic slowdown,” he warned.

Source: CNN Brasil

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