When Chairman Jerome H. Powell spoke at the Kansas City Fed’s annual conference in Jackson Hole, Wyoming, last year, inflation had recently topped 9%, and the Fed had taken a ferocious effort to keep prices down. It was raising interest rates at a pace. Mr. Powell used the platform to issue a stark warning that central bankers will continue with this policy until the task is done.
A year later, the image is very different. Rising interest rates cooled the housing market, coupled with a recovery in supply chains and lower gasoline prices, leading to a notable drop in inflation to 3.2% in July.
Instead of warning that central banks are prepared to push the economy into recession if necessary to calm rapid inflation, Fed officials now say they would cool the economy without hurting it. It reinforces the suggestion that it might do what seemed improbable.
Powell, who is scheduled to speak on Friday morning, is expected to return to the conference later this year, but is expected to stress that the Fed still has work to do to bring inflation back to full normalcy. But many economists and investors think he could be a little less aggressive than he was last year.
Harvard economist Jason Furman said, “Jay Powell would avoid anything resembling ‘mission accomplished,'” which may suggest that Powell has more to do. but added that it wouldn’t have to sound so creepy on Wall Street. . “Unlike last year, Powell doesn’t need to scare anyone.”
Mr. Powell’s solemn words a year ago — suggesting he expected the Fed to inflict economic pain to keep inflation under control — remained skeptical at the time that the Fed would continue to raise rates sharply. It was also part of a rebuke to investors who were . His comments rebalanced and shook financial markets.
But this year, market players have come to understand that a central bank means business. They expect the Fed to have completed, or nearly done, raising rates, but strong economic data also raises the possibility that the Fed will keep rates high for an extended period of time.
This has been particularly noticeable in the bond market, where 10-year Treasury yields have surged significantly over the past month, hitting a high of over 4.3%. With 10-year bond yields supporting borrowing across the economy, the impact of this rise is already evident. Mortgage rates rose to their highest level in more than 20 years this week, and new loan applications fell to their lowest level in nearly 30 years, according to data from the Home Loan Bankers Association. As it becomes more expensive to borrow to buy a home or expand a business, the drastic change in interest rates over the past year could result in a drag on the economy, even if inflation slows.
And while data so far has generally remained strong, with consumer spending and employment outperforming expectations, the belated appearance of Fed policy restraint could undermine today’s resilient economy. There is always reason to fear that
Consumers are starting to use up their savings during the pandemic, and some companies warn it could hurt profits. New data on Wednesday showed an unexpected slowdown in both manufacturing and services last month.
“It was a bit of a reality check,” said Bill O’Donnell, rates strategist at Citigroup.
Some economists argue that these risks are why the Fed is cautious. Officials have already raised interest rates to a 22-year high of between 5.25% and 5.5%. They are considering further rate hikes by the end of the year, but some argue such measures are unnecessary in an economy where inflation has cooled and many policy adjustments are already slated.
But given the economic resilience so far, the Fed also faces another major threat.inflation — i.e. still very highAfter deducting volatile food and fuel prices, it stands at 4.7% and may remain high as consumers decide they can continue to spend and businesses can continue to charge extra.
This is likely to keep Mr. Powell’s resolute attitude.
Analysts said higher Treasury yields could actually dampen demand and help mitigate the risk of prolonged inflation.
“Rate rates are moving in the direction the Fed wants them to go,” said Gennady Goldberg, rates strategist at TD Securities. Ta. “We need to slow growth, and to do that we need to make our financial situation tighter,” he said.
Michael Feroli, chief U.S. economist at JP Morgan, said higher market-based interest rates should give officials confidence that their policies are being reflected in the economy and will continue to slow it down. , said months after commentators wondered why financial conditions were not improving. It reacts more sharply to the movements of the Fed.
“If anything, it removes the challenge and the cause for concern,” Ferroli said. “I think it will probably be welcomed to some degree.”
Because between now and this year there are some more important data releases. Fed September 20 meetingFerroli had expected Powell to avoid sending short-term policy signals too clearly in Friday’s remarks.
But between interest rates already rising, the moratorium on student loan payments coming to an end, and a disappointing slowdown in China’s economic growth, a range of risks cloud the outlook. , some wonder why Mr. Powell’s remarks are more restrained. In his message to the market, he said:
“This is exactly what the Fed wants,” Mr. O’Donnell said, citing rising yields and a slowing economy. “Why would you pour more gasoline into the fire?”