At the Federal Reserve Bank of Kansas City’s Jackson Hole Symposium, Federal Reserve Chair Jay Powell gave a much-anticipated speech titled, Monetary Policy and Price Stability.
Chair Powell spoke on the state of the economy, reiterating that “while the latest economic data have been mixed, in my view our economy continues to show strong underlying momentum. The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers.”
On inflation, he noted it “is running well above 2 percent, and high inflation has continued to spread through the economy. 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.”
Regarding the path for policy, he stated “in current circumstances, with inflation running far above 2 percent and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause.” He also stated that, “our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook. At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.”
Key Implications
Chair Powell’s speech struck a hawkish tone as he reiterated the need to “forcefully” bring demand and supply into balance, which will require a sustained period of below-trend growth.” This reaffirmed the Fed’s intent to continue to raise its policy rate into restrictive territory at its upcoming meeting running from September 20th to 21st. Powell also emphasized the need to keep rates at elevated levels for an extended period of time in order to ensure that inflation decisively returns to target.
Over the last few weeks, financial markets have started to price more tightening from the Fed, with the policy rate expected to land between 3.5% and 3.75% by year-end. This has the U.S. 2-year Treasury yield reaching above 3.4%. But with the 10-year yield trailing behind at close to 3.0%, the deeply inverted yield curve implies that market participants are betting that the Fed won’t be able to keep rates at elevated levels for too long. Though Powell’s comments today were clearly aimed at setting expectations for a higher for longer policy path, markets are expecting that with high inflation and rising rates, the growth slowdown is likely to test the nerves of policymakers.
