Aug 22 (Reuters) – Wage benefits for workers and investors hoping to hold onto earnings, comments by Federal Reserve Chair Jerome Powell at a central bank conference in Wyoming this week suggest inflation will be tackled some fear is also headed for a recession.
He will be the first to admit an uncomfortable fact: he doesn’t know what the next few months will bring.
“In normal times, it’s very difficult to say with confidence … what the economy is going to do in six or 12 months,” Powell said July 27 after the end of the Fed’s last monetary policy meeting. “These are not normal times.” Read more
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Powell is scheduled to speak Friday morning at the Kansas City Fed’s annual Jackson Hole research conference, which will be held at a national park lodge outside of Jackson, western US. The gathering is one of the central bank industry’s A-list events, with executives from around the world kibitzing over cocktails, listening to presentations on new research, hiking in the Grand Teton Mountains and seeing nice-looking jackfruits on the Snake River. Go trout fishing.
The gathering also provides an attention-grabbing platform for a Fed chair or other policymaker to fix their message.
With the Federal Reserve facing its worst inflationary burst since the early 1980s, and raising interest rates sharply to counter it, Powell is likely to focus on that fight. — and the Fed’s unique commitment to winning it.
“What we should hear, and probably will hear, next week is a backlash to the idea” that the Fed thinks it has tightened credit conditions enough to solve the inflation problem, or something like that. The US has been expecting to “blink” at the first sign of economic weakness and either stop raising rates or cut them, said Seema Shah, chief strategist at Principal Global Investors.
Instead, she said Powell is likely to emphasize that “growth is slow and likely to slow, but inflation will remain stable and that his priority is controlling inflation … in response to weak growth.” Will not stop.”
roots of inflation
The groundwork was laid recently in comments from the Fed’s cadre of regional bank governors, who have openly contemplated recession risk as part of inflation control, to describe a “pick and hold” rate-hiking strategy where the cut hasn’t been spaced or called for high pressure sustained large rate hikes like the back-to-back 75 basis point hikes in June and July.
That means a risky second half, particularly for equity investors who have recently boosted share prices, and staff could be caught up in a cycle of layoffs.
The roots of inflation growth are broad, ranging from a volatile ride in energy and food markets, to Russia’s February 24 invasion of Ukraine, to the vagaries of global shipping during the COVID-19 pandemic and what a Fed officials like to refer to it as “revenge spending.” by US consumers to make up for lost time since the virus began in early 2020.
“We are in the midst of an extraordinarily complex pandemic-related economic shutdown and restart,” wrote Bob Miller, BlackRock’s head of America’s fundamental fixed income, last week. “Historical correlations…have been broken” amid simultaneous “shocks” pulling demand, supply and the economy in conflicting directions.
It’s hard to see what happens next: consider that six months later, when the economy is measured by GDP data, companies still hired more than half a million additional workers in July. This has forced the Fed to swap the type of guidance it has used to outline its plans for months in favor of a one-meeting statement of its intentions.
This leaves a thin basis for planning for employees, companies and investors.
Powell’s remarks, which will be delivered at 10:00 am EDT (1400 GMT) Friday, are aimed at American audiences, but the world’s ears will be listening to every word. As head of the world’s most powerful central bank, the 69-year-old former investment banker’s profile for the Fed will have global impact at a time when most other central banks are also locked in the fight against inflation. ,
The Fed’s main policy tool, the federal funds rate, rose from near zero in early March to the current target range of 2.25%-2.50%, with further hikes certain, but continued momentum and the ultimate breakpoint remain in place . it’s not clear. Policymakers around the world have done the same to varying degrees.
Rate hikes actually only affect one aspect of inflation – the part that comes from business and consumer spending. By making borrowing more expensive for things like houses and cars, they discourage these purchases; Lower demand should mean less pressure on prices, and in the case of housing, which can traverse many parts of the economy.
Weak demand and tighter credit can also affect what companies pay for loans while simultaneously reducing spending. It can also have a major impact on stock prices, as stocks are often most attractive when interest rates are low or falling.
The key question facing the Fed and the US economy is whether a previously telegraphed rate hike will cut demand enough to beat inflation, a measure used by the central bank to push its demand to 2%. to reduce. Run at about three times the target.
If it doesn’t, and inflation numbers don’t confirm a sustained slowing trend in the coming months, the Fed will have to reset expectations for even higher borrowing costs — the kind of event that could lead to another sell-off in equities. There could be layoffs in companies and even recessions.
Powell and his colleagues want to avoid that. But, as he is likely to point out, a fall in inflation must slow the economy, and if it doesn’t, the Fed must tighten monetary policy.
“There is a way to bring inflation under control, but in the process, a recession… could occur,” Richmond Fed Chairman Thomas Barkin said Friday on the sidelines of a conference in Maryland. “We’re out of balance today.”
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Reporting by Howard Schneider; Adaptation by Dan Burns and Paul Simao
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