Jay Powell faces tough crowd in Jackson Hole after inflation errors

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As central bankers from around the world descend on Jackson Hole, Wyoming, for the first personal annual conference since 2019, Federal Reserve chairman Jay Powell will face something largely absent from the past two virtual meetings: a tough crowd.

Celebrated two years ago for saving the global economy and financial system from a catastrophic pandemic-induced crash, the U.S. central bank has faltered ever since, initially misdiagnosing what has become the most acute inflation problem in four decades and then forced to to catch up.

As a result, Powell, who was reappointed to a second term in November, is under tremendous pressure to perform a historically difficult task: to fine-tune monetary policy to safeguard the Fed’s inflation-fighting credentials without causing more job losses than is needed.

“This isn’t a great time for the Fed right now, not only because the challenges are huge, but I think the Fed has also made some missteps,” said Ellen Meade, who serves as senior advisor to the central board of governors. bank served. until 2021.

“Powell wants to do the right thing, and he’s not there to make a mistake,” said Meade, who is now a professor at Duke University. “But if he loses this one, it’s the whole ball game.”

The Fed has already embarked on its most aggressive campaign to raise interest rates since 1981 and is expected to take further action during at least the second half of 2022. Central banks in advanced and emerging economies have followed suit, grappling with their own inflation surges exacerbated by the Russian invasion of Ukraine.

But former officials and economists warn that another big test of the Fed’s credibility will come in the next phase of tightening, when inflation has not yet slowed down enough, but the economy is beginning to show clearer signs of weakness.

Jay Powell, left, with then Bank of England governor Mark Carney at the Jackson Hole economic symposium 2019 © Amber Baesler/AP

Powell, whose legacy will depend in large part on the outcome, must reach consensus on what is likely to become a more divided central bank.

The Fed’s predicament stems from its early assessment that the rise in consumer prices caused by supply chain disruption and trillions of dollars in pandemic-related fiscal stimulus was temporary. It was an opinion shared by most, but not all economists to begin with, and one that Powell devoted the entire Jackson Hole speech last year to supporting it.

Distorted data had hidden the strength of the labor market, which is now one of the tightest in history.

Viewing inflation through a “temporary” lens — a term Powell officially abandoned in November — laid the groundwork for a series of policy blunders that led the Fed to expand its balance sheet long after additional support was no longer needed. It also waited until March before raising rates.

“We should have recognized last fall that this was a time to get monetary policy on the right track,” said Randy Quarles, the Fed’s former vice chairman for oversight who left in late 2021. “If we had reacted earlier, inflation would not have reached the level it is now.”

The central bank was too attached to the idea that “you can’t step on the gas and the brake at the same time,” Quarles said, implying that officials felt compelled to raise interest rates until they stopped sucking up Treasuries and agencies. mortgage-backed securities. Others believed the Fed should have started phasing out its bond purchases sooner.

Quarles, who now forecasts Federal Funds interest rates to rise as much as 4 percent next year and a “short and shallow” recession next year, said a rate hike would have been appropriate as early as November.

Powell also admitted last month that the guidance given by the central bank in late 2020, outlining the economic milestones to be achieved before stopping policy easing, was too inflexible for an environment of such extremes. insecurity.

“I don’t think that changed the situation materially, but I have to admit I don’t think I would do that again,” he said.

Heading into this year’s Jackson Hole conference, economists say the Fed has tried to correct many of its past mistakes, by “preloading” its rate hikes and raising key rates from near zero to a target range of 2.25 percent. to 2.50 percent in just four months.

Most officials now expect rates to rise at least another percentage point by the end of the year, with a third consecutive 0.75 percentage point rate hike being considered before the September meeting. But concerns linger over the Fed’s decision to squeeze the economy if unemployment turns higher than expected. The other risk is that inflation may be much more difficult to eradicate than is currently expected.

The fear is a redux of the 1970s, when the Fed vacillated between raising interest rates to stave off price pressures and lowering them to support growth, failing to contain inflation. to get. The central bank then had to step on the brakes more vigorously, causing a much greater economic contraction than would otherwise have been the case.

“The greater risk is that they change course too quickly, not tighten for too long,” said Charles Plosser, who served as president of the Philadelphia Fed from 2006 to 2015. guns? Will they provide enough delay to actually bring inflation down, keep it low and restore the credibility of the Fed?”

While the Fed has labeled its commitment to price stability “unconditional,” officials – unlike most Wall Street economists – insist a recession is not a foregone conclusion.

At their most recent policy meeting, they also discussed the burgeoning signs that the economy is cooling and the risks of getting heavy-handed with tightening, fueling fears that a more divided Fed may prematurely end its fight against inflation.

On Friday, Powell will underline the central bank’s commitment to do whatever it takes to fight inflation, even as she determines it may soon be appropriate for the Fed to make smaller rate hikes.

“The Fed cannot lose control of the narrative right now,” said Claudia Sahm, founder of Sahm Consulting and former Fed economist. “They really need to make it clear that they understand what is at stake [and] what the possible very negative consequences of the path they have taken.”

The Valley Voice
The Valley Voicehttp://thevalleyvoice.org
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.

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