Powell delivers some tough lessons at Jackson Hole
- India Infoline News Service
- 27 Aug , 2022
- 3:14 PM
Over the last few days, global markets had been jittery over what Jerome Powell, the Fed chair, would say in his Jackson Hole Address. The Jackson Hole symposium has emerged as one of the most prestigious congregations of global policy makers and thinkers. Over the last 43 years, the chiefs of central banks from across the globe and leading academicians and economists would get together for a 3-day brainstorming session at Jackson Hole, Wyoming to deliberate. It was as the very Jackson Hole meet in 2019 that the “Dovish till recovery†plan was created and tacitly approved by the participants.
However, 2022 presented a different set of challenges altogether. Post-COVID recovery was done and dusted and the latest challenge was on rampant inflation. Even the theme of the 2022 Jackson Hole Symposium, “Reassessing Constraints on Economy and Policyâ€, was quite clear that the focus would be on how central banks needed to rethink their dovish stance. It is in this light that the speech by Powell had assumed a lot of importance. When Powell eventually spoke on 26th August 2022, it was for less than 10 minutes. However, the message was that Fed was far from done with rate hike and would persist with the hawkish approach till inflation gravitated towards the 2% long term target. Now for the key takeaways from the Powell address.
12 major takeaways from Powell’s address at Jackson Hole
The tone of hawkishness was unmistakeable. However, the message was a lot more elaborate and nuanced. Here are the key takeaways from Powell’s speech.
However, 2022 presented a different set of challenges altogether. Post-COVID recovery was done and dusted and the latest challenge was on rampant inflation. Even the theme of the 2022 Jackson Hole Symposium, “Reassessing Constraints on Economy and Policyâ€, was quite clear that the focus would be on how central banks needed to rethink their dovish stance. It is in this light that the speech by Powell had assumed a lot of importance. When Powell eventually spoke on 26th August 2022, it was for less than 10 minutes. However, the message was that Fed was far from done with rate hike and would persist with the hawkish approach till inflation gravitated towards the 2% long term target. Now for the key takeaways from the Powell address.
12 major takeaways from Powell’s address at Jackson Hole
The tone of hawkishness was unmistakeable. However, the message was a lot more elaborate and nuanced. Here are the key takeaways from Powell’s speech.
- While the Fed chairman, Jerome Powell, underlined that they would continue to hold on to their hawkish stance, the emphasis was on the usage “will use our tools forcefullyâ€. This underlined that the Fed would not hesitate to continue to remain hawkish and hike rates rapidly to curb inflation. Interest rates in the US have already gone up from 0.00%-0.25% range to 2.25%-2.50% range between March and July 2022.
- At Jackson Hole, Powell emphasized that despite the hawkish stance of the Fed, inflation still persisted close to 40-year highs (like Volcker era). In the US, the level of 2.25%-2.50% is considered to be the neutral range. There had been apprehensions that the Fed would go slow from here due to the rate hikes impacting growth directly. However, Powell has underscored that the Fed would not hesitate to attack inflation with force.
- The big debate in the global markets has been, how much of rate hike would the Fed attempt in the September 2022 FOMC meet. Fed has already hiked rates by a record 75 bps in June and repeated another 75 bps in July. The hawkishness in Powell’s speech seems to underline that there could be another 75 bps hike in September. The CME Fedwatch shows the probability of 75 bps hike in September surging to 70%.
- On the question of whether inflation had peaked to warrant a sober stance, Powell did not see merit in going by the data flow of just one month. According to Powell, even if the assumption of inflation peaking was correct, the Fed would go by marked signals of inflation falling. If one looks at a combination of consumer inflation and PCE inflation in the US, the indications are of inflation still sticky at elevated levels.
- The Powell speech has left no one in any doubt that the Fed would chase inflation even if it meant some degree of economic pain. That is why, Powell even warned the audience at Jackson Hole of “some pain†ahead as central bank stuck to its fight against inflation. Obviously, with the inflation at close to 40-year highs, there was little choice but to use the monetary tools at its disposal forcefully and unambiguously.
- In a rather dramatic sweep, Powell declared that for the Fed it was a choice between the devil and the deep sea. The aggressive rate hikes would bring down inflation but it would also have some unfortunate costs like slower growth and softer labour markets. However, Powell was quick to add that the Fed had chosen the lesser of the two evils since the failure to restore price stability would mean much greater pain in the long run.
- On the subject of whether the inflation battle would trigger a recession, Powell underlined that the US real GDP had contracted in the last 2 quarters. It had contracted by -1.6% in Q1 and -0.6% in Q2. However, the revised estimates for Q2 were 30 bps lower than the original estimate. Also, nominal growth in GDP as still above 8% and the pain was purely due to high inflation. That is where the Fed is keeping its focus on.
- Over the last 40 years, there have been consistent debate on whether central banks should focus on price stability or boosting growth. In his Jackson Hole speech, Powell emphasized that “Price stability was the responsibility of the Federal Reserve and served as the bedrock of the US economyâ€. The gist of the message was that, without price stability, the economy does not work for anyone.
- Despite repeated exhortations, Powell has refused to get into specifics of the quantum of rate increase in the coming meets. Fed has been non-committal on 75 bps rate hike in September but has restrained himself to saying that he would prefer to be data driven. He also added in his rather brief address that monetary policy would automatically become appropriate and more palatable as the data points showed improvement.
- Powell emphasised an important aspect that as much as managing inflation was critical, it was also important to manage the inflation expectations. Normally, consumer inflation expectations feed into actual inflation and spending. It is called “Rational Inattentionâ€. People generally pay less attention to inflation when it is low and more attention when it is high. Today, the big risk is that everyone believes inflation will be entrenched.
- At a macro level, Powell once again emphasized that two things had worked against the average American household. Firstly, the post COVID recovery in growth had been largely uneven. The recovery was cornered by the people and the businesses that were less desperate for a recovery. Similarly, inflation was also hitting the sections of the society which were least equipped and capable of handling it. That is the cycle that Powell wants to now break with his overtly hawkish persistence.
- Finally, Powell dwelt at length on the subject of central bank credibility. Inflation expectations of households would be driven by how aggressive the Fed was in fighting inflation. In short, having begun on an anti-inflation drive; the onus was on the Fed to persist with this battle and take it to its logical conclusion. Today, restrictive monetary policy may be needed for a lengthy period of time to stem the high inflation.
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Key takeaways from the Jerome Powell testimony
- India Infoline News Service
- 27 Jun , 2022
- 9:46 AM
Normally, the Fed chairperson testifies before the Senate and later in front of the Congress. On 22nd June, Jerome Powell completed his testimony before the Senate and the Congress testimony is scheduled for 23rd June. However, it is the Senate testimony that actual contains key insights into the thinking of the Fed.
Major takeaways from Jerome Powell’s Senate testimony
Here is what manifests when you read between the lines of the Senate testimony of Jerome Powell on 22nd June.
a) One thing is clear that the Fed remains committed to bringing inflation back to the 2% level, albeit in phases. The testimony also underlines the fact that they would like to hike rates as quickly as possible, implying a lot of front loading.
b) Powell has clarified in his testimony that the Fed would continue to be data driven and no projection or estimate was cast in stone. Hence future rate increases and any reversal would be entirely dependent on the flow of key macro data.
c) In other words, Powell has clarified that the markets cannot treat either the Fed statement or the dot plot chart or even the Fedwatch probabilities as reflective. They were at best indicative and would be decided meeting by meeting.
d) Low inflation was not only essential to keep cost of production low but also to ensure that the people of the US actually enjoyed the full benefits of higher wages. Letting the higher wage benefits get frittered away by higher inflation, defeated the purpose.
e) Fed focuses on PCE (personal consumption expenditure) inflation rather than on the consumer inflation. The PCE inflation has pegged the core inflation at 4.9% for June 2022 in the direction of pushing headline inflation closer to 2% by end of 2023.
f) Powell has suggested that the inflation was likely to be aggravated by secular supply chain constraints, Russian invasion of Ukraine, China lockdowns etc. However, the good news, as emanating from the Powell testimony, was that real GDP had picked up even amidst rising inflation since consumer spending had remained strong and robust.
g) On whether rate hikes were working; early indications were positive according to Powell. The growth in fixed investments were slowing while the housing sector was softening due to high mortgage rates. Tightening of financial conditions was surely helping the US economy to balance demand and supply.
h) Powell pointed to the huge gap between strong labour demand and tepid labour supply, when labour force participation had hardly changed in 5 months. This will keep wage hikes at elevated levels and continue to push consumer demand. It also partially neutralizes the inflation battle.
i) Powell has specifically mentioned in his testimony that the Fed would continue to communicate its thinking in crystal clear terms. Because of clear communication, the financial conditions had significantly tightened as it reflected the actions taken by the Fed so far and the actions that markets were expecting the Fed to take.
j) Finally, Fed will remain flexible enough to adapt to the changed conditions at short notice. For now, inflation has hardened more than expected, so the Fed was focussing on front loading its tightening measures. However, this could transform quickly if the signals are of a slowing economy.
The gist of the testimony was that the US economy was strong enough to handle tighter monetary policy without sacrificing growth. However, “Soft Landing†has always been a great idea on paper, but rarely works in practice.
Have the tools and the resolve too
In any big macroeconomic battle, addressing the problem is not just about having the tools and the strategies but also the intent and the resolve to stick to a tough path. That was the overarching message of Jerome Powell in his Senate testimony. Powell summed it up best, “We are strongly committed to bringing inflation down, and we are moving expeditiously. We have the tools we need and the resolve it will take to restore price stabilityâ€.
Here is the macroeconomic backdrop to the Fed approach on this subject.
· Inflation was sharply above the Fed’s longer-term goal of 2%. For April 2022, the PCE inflation stood at 6.3% while the core PCE inflation stood at 4.9%. According to Powell, the broad basing of inflation in the last few months was due to the Ukraine war, which led to a surge in the price of crude oil. Due to its strong externalities, this resulted in inflation across manufacturing and services.
· Fed has already abandoned the use of the word “Transitory†to describe inflation hinting that lofty oil prices and the COVID-related lockdowns in China could only exacerbate the ongoing supply chain disruptions. The US being a net importer with a huge trade deficit, faces heavy imported inflation.
· There are two issues about growth; rather contrasting. Real GDP growth picked up this quarter as consumption spending remaining strong. Growth in fixed investment is slowing and activity in the housing sector softening due to higher mortgage rates. Hopefully, the tightening in financial conditions should temper growth and help bring demand into better balance with supply; without disrupting long term growth cycles.
Amidst all this chaos and diverse pulls, the labour market continues to remain robust.
Need for an adaptive monetary policy
Powell highlighted that the current situation was a battle of imponderables. Fed had to tighten without disrupting its goal of maximum employment. High inflation is already putting strain on vulnerable sections of society and tightening may be worsening it. Therefore, Powell has spoken about an adaptive monetary policy.
An adaptive policy may be tough in the short term but tries to ensure a soft landing in the medium term. It also has goal of fostering maximum employment and sustaining growth, while trying to control inflation. The idea of an adaptive policy is to keep the approach flexible, ready to modify at short notice and with equal aggression in the other direction. As Powell summed up, monetary policy outcomes rarely evolve the way you want it to.
To capture the gist of Powell’s adaptive thrust, it is a choice between the giraffe and the dinosaur. The one that adapted better survived.
Major takeaways from Jerome Powell’s Senate testimony
Here is what manifests when you read between the lines of the Senate testimony of Jerome Powell on 22nd June.
a) One thing is clear that the Fed remains committed to bringing inflation back to the 2% level, albeit in phases. The testimony also underlines the fact that they would like to hike rates as quickly as possible, implying a lot of front loading.
b) Powell has clarified in his testimony that the Fed would continue to be data driven and no projection or estimate was cast in stone. Hence future rate increases and any reversal would be entirely dependent on the flow of key macro data.
c) In other words, Powell has clarified that the markets cannot treat either the Fed statement or the dot plot chart or even the Fedwatch probabilities as reflective. They were at best indicative and would be decided meeting by meeting.
d) Low inflation was not only essential to keep cost of production low but also to ensure that the people of the US actually enjoyed the full benefits of higher wages. Letting the higher wage benefits get frittered away by higher inflation, defeated the purpose.
e) Fed focuses on PCE (personal consumption expenditure) inflation rather than on the consumer inflation. The PCE inflation has pegged the core inflation at 4.9% for June 2022 in the direction of pushing headline inflation closer to 2% by end of 2023.
f) Powell has suggested that the inflation was likely to be aggravated by secular supply chain constraints, Russian invasion of Ukraine, China lockdowns etc. However, the good news, as emanating from the Powell testimony, was that real GDP had picked up even amidst rising inflation since consumer spending had remained strong and robust.
g) On whether rate hikes were working; early indications were positive according to Powell. The growth in fixed investments were slowing while the housing sector was softening due to high mortgage rates. Tightening of financial conditions was surely helping the US economy to balance demand and supply.
h) Powell pointed to the huge gap between strong labour demand and tepid labour supply, when labour force participation had hardly changed in 5 months. This will keep wage hikes at elevated levels and continue to push consumer demand. It also partially neutralizes the inflation battle.
i) Powell has specifically mentioned in his testimony that the Fed would continue to communicate its thinking in crystal clear terms. Because of clear communication, the financial conditions had significantly tightened as it reflected the actions taken by the Fed so far and the actions that markets were expecting the Fed to take.
j) Finally, Fed will remain flexible enough to adapt to the changed conditions at short notice. For now, inflation has hardened more than expected, so the Fed was focussing on front loading its tightening measures. However, this could transform quickly if the signals are of a slowing economy.
The gist of the testimony was that the US economy was strong enough to handle tighter monetary policy without sacrificing growth. However, “Soft Landing†has always been a great idea on paper, but rarely works in practice.
Have the tools and the resolve too
In any big macroeconomic battle, addressing the problem is not just about having the tools and the strategies but also the intent and the resolve to stick to a tough path. That was the overarching message of Jerome Powell in his Senate testimony. Powell summed it up best, “We are strongly committed to bringing inflation down, and we are moving expeditiously. We have the tools we need and the resolve it will take to restore price stabilityâ€.
Here is the macroeconomic backdrop to the Fed approach on this subject.
· Inflation was sharply above the Fed’s longer-term goal of 2%. For April 2022, the PCE inflation stood at 6.3% while the core PCE inflation stood at 4.9%. According to Powell, the broad basing of inflation in the last few months was due to the Ukraine war, which led to a surge in the price of crude oil. Due to its strong externalities, this resulted in inflation across manufacturing and services.
· Fed has already abandoned the use of the word “Transitory†to describe inflation hinting that lofty oil prices and the COVID-related lockdowns in China could only exacerbate the ongoing supply chain disruptions. The US being a net importer with a huge trade deficit, faces heavy imported inflation.
· There are two issues about growth; rather contrasting. Real GDP growth picked up this quarter as consumption spending remaining strong. Growth in fixed investment is slowing and activity in the housing sector softening due to higher mortgage rates. Hopefully, the tightening in financial conditions should temper growth and help bring demand into better balance with supply; without disrupting long term growth cycles.
Amidst all this chaos and diverse pulls, the labour market continues to remain robust.
Need for an adaptive monetary policy
Powell highlighted that the current situation was a battle of imponderables. Fed had to tighten without disrupting its goal of maximum employment. High inflation is already putting strain on vulnerable sections of society and tightening may be worsening it. Therefore, Powell has spoken about an adaptive monetary policy.
An adaptive policy may be tough in the short term but tries to ensure a soft landing in the medium term. It also has goal of fostering maximum employment and sustaining growth, while trying to control inflation. The idea of an adaptive policy is to keep the approach flexible, ready to modify at short notice and with equal aggression in the other direction. As Powell summed up, monetary policy outcomes rarely evolve the way you want it to.
To capture the gist of Powell’s adaptive thrust, it is a choice between the giraffe and the dinosaur. The one that adapted better survived.
What we read in Chairman Powell’s Fed Testimony
- 08 Mar , 2023
- 9:28 AM
- One of the much awaited events in the US after the Fed monetary policy statement and the minutes is the testimony of the Fed Chair before the Senate Banking Committee.
In his testimony delivered on Tuesday, Powell almost reiterated most of the things that he has said over the last couple of months since the undertone of the data had changed. Here are some major takeaways from Jerome Powell’s Fed testimony.
Price stability will not be compromised
That is something that Powell has been increasingly focusing on over the last couple of months, since the Fed turned slightly hawkish. As Powell reiterated, the Fed remained steadfastly committed to its 2% inflation goal in the medium to long run. Powell also added that the full impact of the tightening was yet to show up and that may involve a lag. However, the statement from Powell was fairly clear on the intent of the Fed going ahead. “While our policy actions are guided by the dual mandate of maximum employment and stable prices; without price stability, the economy does not work for anyone.” That best sums up where the focus of the Fed and the Fed chair will be in the coming months.
Clear reversal in the softening trend
This has been the theme of the Fed, when it announced the minutes of the February FOMC meet. That has one again been reiterated by Powell in his testimony to the Senate Banking Committee. The data for January on employment, consumer spending, manufacturing and inflation had partly reversed the softening trends had had been visible in November and December 2022. While part of the reversal in data in January can be attributed to the warm weather, Powell underlined that the breadth of the reversal combined with revisions to the previous quarter were indicative of rampant inflationary pressures in the US economy. As Powell has underlined time and again, the January data flows were a shocker and showed that it was still too early to call the end of rate hikes or even being close to the end.
Hardly any sign of disinflation, says Powell
In a sense, disinflation is the opposite of inflation. When prices start coming off, as can be expected from aggressively hawkish monetary policy, that is disinflation and it shows that the inflation momentum is shifting. As Powell put it, despite the tapering of inflation, disinflation was hardly visible in the January data. For instance, despite moderating, inflation has remained well above the FOMC target of 2% since the middle of 2022. The PCE inflation, which the Fed uses for monetary policy decisions, had slowed from its peak of 7.0% in June 2022 to 5.4% in January 2022. However, as Powell put it, this fall is more due to weakening of energy prices, even as food and core inflation continue to remain sticky and persistent. That is not a very good example of sustained disinflation, which is worrying.
GDP Growth is still a question mark
In his testimony, Powell has expressed some strong reservations about the traction in real GDP growth. In the year 2022, the US economy slowed significantly with real GDP growing at well below 0.9%. The irony is that expanding consumer spending is normally consistent with high GDP growth, in an economy like the US which is largely consumption driven. However, other than consumer spending, other drivers of growth have not been supportive. For example, activity in the housing sector continues to weaken, largely reflecting higher mortgage rates. Apart from the impact on individual housing, the higher interest rates and slower output growth are also starting to weigh on business fixed investment. Overall, there is pressure on any kind of investment outlays in the economy, which is not accretive for the economy in the longer term.
Jobs are the real joker in the pack
There is a strange irony in the US markets as Powell puts it in the testimony. Despite the slowdown in growth, the labour market or the jobs market remains extremely tight. That means the demand is far in excess of supply, which is putting upward pressure on wages. Look at the numbers. The unemployment rate was 3.4% in January 2023, a level that was last seen in the year 1969. Job creation has been much stronger than expected but the availability of labour has been a big drag. For instance, on an average, in the US jobs market, there are 1.9 job openings for each unemployed individual. It is not just that this ratio is at a historically high level, but even the unemployment insurance claims have remained near historical lows. This is a combination of events that is putting pressure in the ability of higher rates to translate into lower inflation as strong purchasing power is the barrier.
So, here is what the Fed proposes to do
What does this Fed testimony say about the future trajectory of Fed action? That is the million dollar question. The Fed stance is quite clear from the Fed testimony of Jerome Powell on 07th March 2023. In terms of policy outcomes, here are the implications.
- With inflation well above the long run goal of the Fed at 2% and tight labour market, the FOMC is likely to continue to hike rates well above the current range of 4.50%-4.75%. This also virtually does away with any chances of rate cuts in 2023 and that may now be put off to 2024. The terminal rates are not yet evident at this point, but going by the current hawkishness, the CME Fedwatch is building in terminal rates of 5.50% to 5.75%.
- Powell has also underlined that as a policy measure, they would amplify the rate hikes with sustained winding down of the US Fed balance sheet. It is already down by $550 billion since June last year and could go well below $8 trillion by the end of the current calendar year. Of course, on the liquidity front, there will be a balancing act.
- Powell reiterated that the impact on inflation is normally seen in phases. For instance, the first and immediate impact is felt on the rate sensitive sectors like housing, business inventory accumulation etc. That is already visible. However, Powell has also reiterated that there will be no long range guidance and each meeting would be taken up by the FOMC members on a case-by-case basis on the strength of the data flows.
- As Powell has underlined, the problem is not absolute but relative. In other words, the fall in inflation as an outcome of rate hikes has not been as intense or as rapid as the FOMC members had expected. That is where the gap is coming and that has nothing to do with the efficacy of rate hikes as a tool to control inflation. This problem became more pronounced in the January 2023 data. This also means higher terminal rates.
- On the inflation expectations, Powell underlined that it was essential for the Fed to ensure that inflation expectations are anchored to actual inflation figures. That is only possible if the consumers are convinced that the Fed would go all out to control inflation. For now, inflation expectations have stayed anchored.
For now, the next meeting of the FOMC scheduled in late March 2023 is expected to raise interest rates by 25 bps. However, markets are now assigning a 30% probability that the rates in March 2023 may be hiked by 50 bps instead of 25 bps. How Powell and his team will manage the rate hikes, without triggering an economic slowdown remains the million dollar question.
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When the Fed concludes its bi-monthly FOMC meet, the Fed statement and the Fed minutes are important documents. One more thing that has a strong bearing on market sentiments is the testimony of the chair.
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