For this new issue of EcoTVweek, we are interested in the late summer key economic event: the US Federal Reserve Symposium in Jackson Hole. More precisely, we take a close look at Jerome Powell’s opening remarks, which were the focus of attention and focused on the short term and inflation. What is the main takeaway? The fight against inflation is not over yet – a message echoed and supported by Christine Lagarde too in her own address.
Jerome Powell sets the tone right from the start when he says, quoted: “It is the Fed’s job to bring inflation down to our 2% goal, and we will do so.” And he makes another important reminder at the end of his speech, quoted: “2% is and will remain our inflation objective,” responding to the debate over whether to raise the inflation target. He welcomes naturally the fall in inflation since its peak in mid-2022 but, not surprisingly, inflation remains labelled as too high and the disinflation process still has a long way to go.
The Fed is therefore not only prepared to raise policy rates further if appropriate. But it also signals its intention to hold policy at a restrictive level until it is confident that inflation is moving sustainably down towards the objective. The message is clear. There is however significant uncertainty about the extent and speed of the forthcoming deceleration of inflation, growth and the labour market, given their resilience so far.
Jerome Powell highlights indeed how challenging it is to know in real time the level of the neutral rate of interest and thus the precise level of monetary policy restraint, in order to know if and when it is sufficient to restore price stability. This assessment is further complicated by the traditional uncertainty about the duration of monetary policy transmission lags, coupled with a new source of uncertainty stemming from the supply and demand dislocations unique to this cycle. Their effects are reflected in particular in the absence of a rise in the unemployment rate so far. This is a welcome result, but it is also historically unusual. In addition, there are signs of greater responsiveness of inflation to labour market tightness.
Will these new dynamics persist? The debate is open and further complicates the task of central banks, which are engaged now in a fine-tuning of their monetary policy. This is why Jerome Powell, while showing a hawkish bias, made it clear too that the Fed will proceed carefully, be data-dependent and have a risk-management approach. Thank you for watching and tune in again next week for a new edition of EcoTV Week.
