December 9, 2021

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Why Jay Powell should be bold at Jackson Hole

Federal Reserve updates

The writer is president of Queens’ College, Cambridge and an adviser to Allianz and Gramercy

Federal Reserve chairs usually approach the annual confab of central bankers at Jackson Hole, Wyoming, in one of two ways. Either fly under the radar screens of markets, or offer up some eye-grabbing policy announcement.

It would not surprise me if Jay Powell, in his keynote speech this week, opts for the former. Some might even see this as a more risk averse option. That would be unfortunate. The wellbeing of the economy, the Fed and financial markets call for Powell to take the latter route. It is also the less risky option.

Vacillation by Fed chairs on how to handle their Jackson Hole pronouncements is natural. Choosing a lower key approach fits with the symposium’s stated intention of bringing “together economists, financial market participants, academics, US government representatives and news media to discuss long-term policy issues of mutual concern.” Yet with all those in attendance and the media coverage this entails, it can also be appropriate to spice things up by signalling an upcoming policy change.

Ben Bernanke memorably did so in 2010, previewing the expanded use of unconventional policies to pursue broad economic objectives rather than just to calm volatile, dysfunctional financial markets.

Powell has repeatedly signalled his preference for a slow and finely graduated evolution in policies. It is consistent with a still-uncertain economic outlook and a jobs deficit. It seems to minimise the risk of big market turbulence, especially after the 2013 and 2018 experiences.

There is also a lot to be said about the longer-term perspective of this year’s topic: “Macroeconomic Policy in an Uneven Economy.” Inequalities of income, wealth and opportunity continue to worsen; climate change threats are multiplying, and there is greater dispersion in growth performance around the world. It is an opportune time for central bankers to say more on the role they can, and should, play in ensuring more inclusive and sustainable economic growth.

Despite the importance of these themes, a consequential number of people await to hear what only Powell can deliver — when and how the Fed will pivot away from the Covid-related emergency measures introduced at the start of the pandemic. Recent economic data accentuate the need for clarity on this.

On the Fed’s two mandate objectives, employment and inflation, the central bank has got a lot closer to meeting one but exceeding the other. The worrisome overhang of its third, and more informal, objective of market stability is getting bigger, as risk assets have continued to decouple from fundamentals, setting new records and fuelling concerns about unsettling market volatility ahead.

The recent employment report suggests labour market improvement is accelerating. The monthly unemployment rate fell by 0.5 percentage points to 5.4 per cent in July; the employment-population ratio and labour force participation edged higher; nearly 1.9m jobs were created in June and July. Job vacancies have risen to a record 10m. Not surprisingly, the respected Harvard economist Jason Furman stated on Twitter: “I have yet to find a blemish in this jobs report. I’ve never before seen such a wonderful set of economic data”.

However, inflation concerns have yet to dissipate. While consumer price index gauges did not go up in July, they remain elevated at 5.4 per cent for the headline rate and 4.3 per cent for core, excluding food and energy. But PPI, tracking producer prices, rose more than expected and to worrisome levels of 7.8 per cent and 6.1 per cent, respectively.

No wonder many companies used their earnings releases earlier this month to signal higher costs and price increases ahead. And much of this came before the new round of supply disruptions owing to the surge in Delta variant infections and hospitalisations, undermining cross-border supply chains.

The employment and inflation data have led several more Federal Open Market Committee members to come out openly in favour of an earlier tapering down of the Fed’s $120bn of monthly asset purchases. In contrast, Powell is yet to evolve from his often-repeated preference for maintaining these massive liquidity injections for longer. Naturally, investors and traders prefer to take comfort from the steadfast dovishness of the only voices that matter for them — that of Powell and his closest two senior colleagues, Richard Clarida and John Williams.

The longer Powell waits to detail his own thinking, the greater the challenges to maintaining Fed unity, and the bigger risk that the central bank will be forced into a more disorderly slamming of the policy brakes down the road.

His highly anticipated speech at Jackson Hole on 27 August is thus a valuable opportunity for him to regain the policy narrative. Indeed, failure to do so is more risky than the seemingly easier option of avoidance — for the economy, for financial stability, and for the reputation of the world’s most powerful central bank.

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