Through Howard Schneider
— (Reuters) Federal Reserve Chair Jerome Powell’s remarks this week to a central banking conference in Wyoming will lay out what he expects to happen in an economy fighting inflation while also, some fear, edging towards a recession. For workers hoping to hold onto wage gains and investors hoping to hang onto profits.
One unsettling fact, which he would be the first to admit, is that he has no idea what the coming months may hold.
On July 27, Powell stated that it was “extremely difficult to say with any certainty in normal times” what the economy might look like in six or twelve months. These times are not typical.
Powell will talk on Friday morning at the annual Jackson Hole research conference of the Kansas City Fed, which will take place in a lodge outside of Jackson in the western U.S. state. The event is one of the elite gatherings for the central banking industry, with international leaders mingling over cocktails, taking in talks about recent findings, hiking in the Grand Teton Mountains, and fly fishing for fine-spotted cutthroat trout on the Snake River.
The event also provides a prominent platform from which the head of the Fed or another policymaker can fine-tune their messaging.
Powell is anticipated to put the focus firmly on that conflict—and on the Fed’s unwavering dedication to winning it—as the US central bank battles the worst breakout of inflation since the early 1980s.
According to Seema Shah, chief strategist at Principal Global Investors, “what we should hear and are likely to hear next week is push-back” to the notion that the Fed believes it has tightened credit conditions sufficiently to solve the inflation problem or that, as some have speculated, it would “blink” at the first sign of economic weakness and either stop raising rates or even begin cutting them.
Instead, she predicted Powell will emphasize how “inflation will remain sticky and their aim is to manage inflation… They are not about to halt in reaction to slower growth,” despite the fact that “growth is slowing and is expected to drop further.”
Graph: The G20’s inflation rate is on the rise https://graphics.reuters.com/GLOBAL-ECONOMY/INFLATION/byprjyxznpe/chart.png
ROOTS OF INFLATION, BROAD
The foundation has already been laid in recent remarks from the Fed’s cadre of regional bank presidents, who have openly entertained the risk of recession as part of controlling inflation, used expressions like “raise and hold” to describe a rate-hiking strategy where cuts have not yet found a place, or outright called for continued significant rate increases like the back-to-back 75 basis-point hikes made in June and July.
It suggests a difficult second half of the year, with hazards for equity investors who have recently driven stock prices higher and employees who could be caught off guard by a wave of layoffs.
The COVID-19 pandemic’s unpredictable global shipping conditions, as well as what one Fed official likes to refer to as “revenge spending” by American consumers to make up for lost time since the virus first appeared in early 2020, are all contributing factors to the inflationary surge. Other factors include the volatile ride in energy and food markets following Russia’s invasion of Ukraine on February 24.
Bob Miller, head of Americas basic fixed income at BlackRock, stated last week that “we are in in the midst of an extraordinarily complicated pandemic-related economic shutdown and restart.” The simultaneous “shocks” driving demand, supply, and the economy as a whole in opposing directions have “broken down historical connections.”
Understanding what will happen next has gotten incredibly challenging: Just take into account that firms nevertheless hired more than 500,000 additional workers in July despite the economy contracting for the previous six months as reflected by data on the gross domestic product. Due to this, the Fed is now required to outline its goals at each meeting rather than using the kind of advice it had previously used to sketch out its plans for the next months.
That provides little groundwork for planning for employees, companies, and investors.
Graph: The reaction of the central bank https://graphics.reuters.com/GLOBAL-ECONOMY/RATES/egpbkdqnxvq/chart.png
RETRESSION “COULD” TAKE PLACE
The world will be listening intently to Powell’s remarks, which are scheduled to be made at 10 a.m. EDT (1400 GMT) on Friday. The direction the 69-year-old former investment banker charts for the Fed as the head of the most potent central bank in the world will have an impact on countries all around the world at a time when most other central banks are also engaged in their own wars against inflation.
The federal funds rate, the Fed’s primary tool for monetary policy, has climbed from near zero in early March to the current target range of 2.25% to 2.50%; further increases are very certainly on the way, but it is still uncertain at what rate and when they will end. To varied degrees, policymakers have carried out the same action everywhere around the world.
The portion of inflation that results from corporate and consumer spending is the only aspect of inflation that the rate rises actually affect. Reduced demand should result in less pressure on prices, which in the case of housing can ripple across many sectors of the economy. By increasing the cost of loans for items like houses and vehicles, they discourage those purchases.
Altering demand and tighter credit can also have an impact on how much it costs firms to borrow money, which can constrain their spending. Since stocks are frequently at their most appealing when interest rates are low or declining, it can also have a significant impact on stock values.
The main concern facing the Fed and the American economy is whether the rate rises that have already been signaled will be able to quell demand sufficiently to lower inflation, which according to one metric used by the central bank is currently running at almost three times its 2% target.
If not, and inflation figures fail to support a persistent decreasing trend in the upcoming months, the Fed will have to re-calibrate expectations for further higher borrowing costs. This kind of situation could result in new stock market declines, corporate layoffs, and possibly even a recession.
Powell and his colleagues seek to avoid such result. However, as he is likely to underline, for inflation to decline, the economy must slow; otherwise, the Fed will need to tighten policy much more.
On the fringes of a conference in Maryland on Friday, Richmond Fed President Thomas Barkin told reporters that there was a way to controlling inflation, but that a recession might occur in the process. “Today we are out of balance.”
(Editing by Dan Burns and Paul Simao; reporting by Howard Schneider)
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