Chair Powell’s remarks at Jackson Hole 2022 were brief but to the point.
At the Jackson Hole Symposium of 2022, FOMC Chair Powell was clear on the Committee’s resolve to bring inflation to heel and their purpose in doing so – it being necessary to safe-guard the long-term welfare of the US economy.
In fact, the key opening remarks referred to his “overarching focus right now” being to “bring inflation back down to our 2 percent goal”. The clear objective of that statement is to send a strong message that the FOMC is fully committed to restoring inflation to target and containing inflationary expectations.
On the timing of further hikes, “[r]estoring price stability will take some time and requires using our tools forcefully” speaks to a need for rapid policy tightening; and “[w]e will keep at it until we are confident the job is done” implies the Committee do not intend to pause mid-way through this cycle.
Elsewhere in Chair Powell’s speech, justification for charting this course is found. Quoting Chairman Paul Volcker from 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”. Further, in Chair Powell’s own words, “[h]istory shows that the employment costs of bringing down inflation are likely to increase with delay”. Finally, “[r]estoring price stability will likely require maintaining a restrictive policy stance for some time” emphasises the Committee plan to hold the fed funds rate at its peak level for an extended period, with reducing inflation “likely to require a sustained period of below-trend growth”.
However, the number of hikes from here was left relatively open by Chair Powell. The need for “restrictive” policy signals an expected peak rate above 3.0% — the top of the ‘neutral range’ Chair Powell has previously given as a guide. While reference to the June FOMC “median federal funds rate” forecast being “slightly below 4 percent through the end of 2023” arguably leaves 4.0% as an upper limit for the peak given a downtrend is forming in the CPI detail and as a material negative output gap has already been established compared to the FOMC’s June forecast of trend growth through 2022-2024.
Our current forecast for a peak fed funds range of 3.25%-3.50% in December sits right in the middle of this range and looks to be consistent with the FOMC’s planned timing. Yet the same could also be said for a 3.50%-3.75% range, the additional 25bps coming in the form of either a 75bp September hike (our current forecast is 50bps), or via a second 50bp increase in November (our current forecast is 25bps). Either path would require a 25bp last move come December.
For our current forecast to be achieved, nonfarm payroll growth must decelerate from the next read (the August report is due this Friday). August also needs to record another benign CPI inflation print, with the scale and breadth of domestic price pressures critical. Even if both outcomes are as we expect and the FOMC hike by 50bps in September, a 50bp move come November will remain a material risk.
A final word on financial conditions. Term interest rates can quickly reverse course, the US 10 year as an example falling from a peak of 3.50% to near 2.60% in around 6 weeks from mid-June to the beginning of August. If yields jolt lower again before a downtrend in inflation is firmly established, the FOMC may decide to take out additional short-term insurance. Fed funds rate cuts are unlikely before late-2023, but will continue through 2024.
