Powell Signals No Fed Policy Shift at Jackson Hole

Investors should not expect any significant changes in U.S. monetary policy during the upcoming months, according to Federal Reserve Board Chair Jerome H. Powell, in addressing the Jackson Hole Economic Policy Symposium on Aug. 27, 2021.

In brief, Powell sees current spikes in inflation as largely the result of transitory factors, indicating that the central bank “will continue to hold the [current] target range for the fed funds rate until maximum employment and sustained 2% inflation” are achieved. Highlights of Powell’s remarks are summarized below, based on Investopedia’s viewing of the livestream.

Background

Powell, like several of his predecessors, has used the annual Jackson Hole Symposium, sponsored by the Federal Reserve Bank of Kansas City, to make major pronouncements on the economy and monetary policy, making it an event watched closely by investors. Minutes of the Fed’s July 27-28 meeting revealed that a majority of its Board of Governors believes that they should begin to trim their bond purchase program from its current target of $120 billion per month.

Markets Respond

Starting in the hours before Powell’s speech and continuing after the speech, the markets registered confidence that the Fed can taper, or slowly withdraw, monetary stimulus without causing a spike in interest rates. The leading U.S. market indices all recorded solid gains.

Economic Recovery

“The path to recovery has been a difficult one,” Powell noted. He observed that the sharp recession spurred by the COVID-19 pandemic and subsequent shutdowns of the economy was the briefest, yet deepest, on record. Nonetheless, total economic output surpassed its previous high within four quarters, and average personal income rose rather than fell during this period.

Inflation

While noting that various measures of inflation are running in a range between 3.6% and 4.2% annually, well above the Fed’s long-term goal of 2%, Powell indicated that “transitory factors” affecting “a narrow group of goods and services impacted by the pandemic” are mainly to blame.

In particular, Powell observed, “Elevated inflation in durable goods is due to supply bottlenecks.” He added that inflation in durables is stabilizing and may fall as supply problems end. A major contributor to inflation in durables has been used car prices, which current data shows as stabilizing and thus on track to bring broader measures of inflation down. Overall, he sees growing improvement in “supply and demand imbalances.”

Powell also cautioned that current 12-month measures of inflation are not now capturing certain sharp price declines that occurred early in the economic downturn, notably in airlines and hotels. Additionally, while there have been significant wage increases in certain industries as firms try to fill open jobs, he sees little evidence that a wage-price spiral is developing in which wage increases passed on to consumers fuel successive rounds of inflation.

Rather, Powell sees the current trend of wages as consistent with the Fed’s long-term goal of 2% aggregate inflation. Indeed, he indicated that there are still “sustained deflationary pressures” coming from technology, globalization, and possibly also demographics. “Overall global deflationary trends remain in force,” he believes.

Finally, the Fed Chair noted that expectations about future levels of inflation are moving less than the current readings. This, he says, shows widespread confidence that the Fed will keep long-term inflation at 2%.

Employment

While noting that “employment gains have been faster than expected” and that “the outlook for employment is solid,” Powell added that there remain employment issues in services and among minorities. While spending on durable goods has enjoyed a boom, rising 20% above trend, spending on services is 7% below trend.

Overall, however, he sees “a fast pace of hiring,” wherein many employers “cannot fill jobs fast enough,” creating “a good environment for job seekers.” Moreover, “some factors holding back job seekers are fading.” Powell’s baseline outlook is that the U.S. economy is “still on trend to maximum employment with 2% inflation.” Meanwhile, he still sees “substantial slack in the labor market.”

The Path Ahead for Monetary Policy

Powell opined, “Anchoring [inflationary] expectations at 2% is important for the economy.” Meanwhile, he added, history teaches that policymakers should not try to offset temporary factors, since the delayed effects of policy moves may cause longer-term harm. Specifically, monetary tightening now in response to current upticks in inflation caused by transitory factors may hurt economic growth and employment in the longer term, while having little impact on future inflation.

By same token, however, policymakers also must be sure that what appear to be transitory factors actually are not long term. “There is no substitute for incoming data,” he stated.

While Powell expects continued strong job creation, the Fed will monitor the impacts of the COVID-19 delta variant. Regarding asset purchases, Powell sides with the consensus view of the Fed Governors at their July meeting that this program can be cut back eventually. However, he expects to continue asset purchases until progress is made on full employment.

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