The Unequivocal Jay Powell

If you were expecting ambiguity, this wan't your speech.

“At past Jackson Hole conferences, I have discussed broad topics . . . Today, my remarks will be shorter, my focus narrower, and my message more direct.”

With those opening words, Jerome Powell set the tone for his roughly 8-1/2 minute speech at the Jackson Hole Economic Symposium, held yesterday, August 26.

For some time, market observers and participants had been waiting with bated breath to hear what Powell would actually say. Previous to this, keen observers likely took note of, for example, Neel Kashkari’s comments at the Aspen Economic Strategy Group's 2022 annual meeting in Aspen, Colorado.

Amongst other things, Kashkari wrapped up one portion of the discussion by saying:

The idea that we are going to start cutting rates early next year, when inflation is very likely going to be well, well, well in excess of our target, I just think it’s not realistic. I think a much more likely scenario is that we will raise rates to some point and then we will sit there until we get convinced that inflation is well on its way back down to 2% before I would think about easing back on interest rates.” (Italics mine)

But Kashkari is just one Fed Governor, one voice among many. What, exactly, was Powell ready to say on the record?

Analyzing Powell’s Speech

If you so desire, you can read his entire speech for yourself or watch the video using the handy link I provided above.

For readers who may prefer the “Cliffs Notes” version, here are a few key takeaways that caught my attention. As you read the following brief excerpts, please note that I italicized what I believe to be key portions, for emphasis.

The Federal Open Market Committee's (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone.

Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. . . . [Higher] interest rates . . . will also bring some pain to households and businesses. . . . While the lower inflation readings for July are welcome, a single month's improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down.

. . . July's increase in the target range was the second 75 basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting. Restoring price stability will likely require maintaining a restrictive policy stance for some time.

Overarching focus, forceful use of available tools, pain for households and businesses. These concepts don’t bespeak ambiguity, do they?

From there, Powell went on to discuss three lessons learned from the 1970s and 1980s concerning the truly negative effects of pernicious inflation. Here’s just one key excerpt from that discussion. As you read it, please note Powell’s invocation of legendary former Fed Chairman Paul Volcker.

During the 1970s, as inflation climbed, the anticipation of high inflation became entrenched in the economic decisionmaking of households and businesses. The more inflation rose, the more people came to expect it to remain high, and they built that belief into wage and pricing decisions. As former Chairman Paul Volcker put it at the height of the Great Inflation in 1979, "Inflation feeds in part on itself, so part of the job of returning to a more stable and more productive economy must be to break the grip of inflationary expectations."

The quote from Volcker is meaningful; “Inflation feeds in part on itself.” In other words, it becomes a self-fulfilling prophecy. If you are a small business owner, and you are convinced you will need to increase the wages for your employees by 5% as well as incur a similar increase in the cost of raw materials, you are going to preemptively raise your own prices in anticipation of this. And this becomes a vicious circle.

Let me conclude this brief overview with how Powell wrapped things up, with the third of the 3 lessons he referenced. Please notice that, once again, he invokes Volcker.

That brings me to the third lesson, which is that we must keep at it until the job is done. History shows that the employment costs of bringing down inflation are likely to increase with delay, as high inflation becomes more entrenched in wage and price setting. The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.

These lessons are guiding us as we use our tools to bring inflation down. We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.

What Likely Lies Ahead?

Given all of this, what may lie ahead?

While it is impossible to predict with certainty, let’s see if we can perhaps take a shot. First of all, here, courtesy of Bloomberg, is what is known as the “dot plot,” as it stood at the end of the Fed’s June meeting.

At this time, the median year-end projection for the federal funds rate was 3.4%, and the estimate for the end of 2023 stood at near 3.8%.

In his recent comments cited earlier, here is what Neel Kashkari said:

I mean, this [the July inflation report] is just the first hint that maybe inflation is starting to move in the right direction, but it doesn’t change my path . . . [with respect to interest rates] I recommended being at 3.9% by the end of this year and 4.4% by the end of the following year. I haven’t seen anything that changes that.

Following the July increase of 75 basis points, the current Fed Funds rate sits at a target range of 2.25-2.50%.

Given Kashkari’s comments, together with Powell’s reference to the effect that “another unusually large increase could be appropriate at our next meeting,” another increase of .75% seems, to me, to be more likely than not. Given how clear Powell was, certainly no one could legitimately say this would come as a surprise. Why would the Fed waste that opportunity?

Such an increase would get us to a target range of 3.00-3.25%. At that point, the Fed could do an additional 50 basis point increase in November and 25 basis point increase in December, and we would be right about where Kashkari said he feels is right.

Alternatively, some commentators have expressed the belief that a 100 basis point increase could be on the table for September. That would get us to a target range of 3.25-3.50%. This would allow the Fed to sit tight in November so as not to be seen as interfering, one way or another, in the midterm elections. If true, then either a 25 or 50 basis point increase in December would get us to the same endpoint.

Things would get very interesting at that point. If, by the end of the year, we sit at or close to 4%, a lot of rate increases could be considered to have been front-loaded. Could the Fed then take that pause to see how things played out? It certainly is interesting to ponder.

Summary and Conclusion

Well, this makes for 3 articles that I have written in a very short span of time. I hope I haven’t been overwhelming you! If I have been, don’t worry, I will very quickly be back to my normal pace of an article roughly once a week or so. It is just that a whole lot has come together in the past week, and I felt like I owed readers my best commentary.

As always, please feel free to drop a comment, question, or even criticism in the comments section below.

Thank you for honoring me with your time by reading my work.