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Fed's 'raise and keep' inflation game in focus as Jackson Hole awaits Powell

Howard Schneider

Jackson Hole, Wyoming. (Reuters) – If “raise and hold” sounds like a poker strategy, it actually sums up the all-in fight style Federal Reserve Chairman Jerome Powell is expected to speak at the Jackson Hole Central Bank on Friday. Inflation was addressed in a much-anticipated speech at the conference.

As the debate has intensified in recent weeks over whether the U.S. economy is on the verge of a recession and how that might make the Fed give up on raising interest rates, Powell’s colleagues strongly I tend to think that the U.S. central bank’s benchmark overnight rate will not only continue to rise, but remain high until inflation returns to the Fed’s 2% target.

By the Fed’s preferred measure, inflation is currently about three times that level.

“Once we get to where I see fit, I’m really going to stick with it as hard as I can and purposefully analyze and evaluate how our policies flow through the economy,” Atlanta Fed President Rafael Bostic told the Wall Street Journal this week.

“Expect some weakness in the economy,” he continued, and “it’s very important that we resist the temptation to be too reactionary and really make sure we get inflation before we do anything to increase The rate is expected to hit 2% before the policy stance eases.”

Translation: Don’t expect the Fed to rescue the economy or the jobless from a mild downturn.

Comments by Bostic and other Fed officials mark a subtle but important shift in the Fed’s focus on talking about what it is doing, something Powell may be poised for when he takes the podium on the hill Emphasize this at 10AM ET (1400GMT) at a resort hotel outside Jackson, Wyoming.

In recent weeks, Fed officials have shifted from avoiding the use of the “R” word, indicating they want to avoid a recession, to downplaying its importance, especially in the event of the worst of the economic crisis. 40 years of inflation. Controlling the growth of price pressure remains their main focus.

“I don’t think the risk of a prolonged or deep recession is very high,” Philadelphia Fed President Patrick Harker said in an interview with CNBC on Thursday.

The wording is in line with expectations in the U.K. and elsewhere in Europe that the central bank may need to keep raising interest rates in a downturn, rather than offering help in the form of lower borrowing costs to boost the economy. economy and employment.

While central bankers try to avoid a trade-off between inflation and employment, they believe they have made the wrong sacrifice in recent years of low inflation due to a false fear of rising prices, they admit They may have no choice in the current environment.

The pain of a modest recession will be severe for those who have lost their jobs. In the Fed’s view, the cost of runaway inflation will be higher, and the risks in the future will also be greater.

Fed’s evolving game plan: ‘Raise and hold’ –

Return to “regular” policy?

The task now is to sell this view to the public.

“The labor market is very tight … I suspect there’s some easing in the labor market, you’ll see Kansas City Fed President Esther George told CNBC on Thursday that with The Fed cools the economy and unemployment will rise.”

The Fed’s target lending rate is currently set between 2.25% and 2.50%, George said it may need to rise above 4.00%, with inflation falling “we’re going to have to hold” for a while time.

There is no guarantee how long this might take or how much it might cost in terms of lost jobs and outputs.

But this will be a landmark moment for the Fed. The last time the U.S. federal funds rate was above 2.50% was in 2008, when the central bank slashed rates in response to the rapidly accelerating global financial crisis. Interest rates have not stabilized at such high levels since 2006-2007, when the credit-fueled housing bubble began to burst.

The results then were dire: a prolonged and scarred recession fueled the collapse of the banking system, followed by a painfully slow recovery.

The hope this time is that if a recession occurs soon, it will be shallow, constrained by the fact that the financial system is better buffered and less prone to A small dip becomes a matter of the worse situation. At the same time, the debt burden on businesses and households has generally eased.

If inflation can be brought under control without a deep collapse, it may even herald a return to a simpler central bank model of managing the troughs of the business cycle simply by changing the federal funds rate.

With the onset of the 2007-2009 recession, the Federal Reserve lowered interest rates to near zero for the first time. With the economy clearly in need of more support, the central bank rolled out a new bond-buying program and other initiatives, which were replicated and expanded in response to the 2020 pandemic-induced recession.

In fact, the Fed has spent most of the past 15 years focused on how to manage policy under the “zero lower bound”, proving to politicians that it is possible to expand its “quantitative easing” asset purchase program Reasonable, research their effectiveness, and figure out how to quit them.

Much depends on how steadily inflation falls and how quickly unemployment rises.

But if the current approach succeeds, the Fed may be about to turn the page on an era of “unconventional” monetary policy and return to an approach more akin to the 1990s and early 2000s.

“They’re going to recalibrate the monetary policy table to an era where both output and inflation are at risk…which means you’re more comfortable with traditional policy,” said Vincent Reinhart, a former Fed staffer, now German Chief Economist at Refus and Mellon Bank. “It’s going to be a very big win.”

(Reporting by Howard Schneider; Editing by Paul Simao)



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