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HomeEconomyPredictions for Powell's Mountain Vacations: High inflation, limited visibility

Predictions for Powell's Mountain Vacations: High inflation, limited visibility

Howard Schneider

(Reuters) – For workers who want to keep wages up and investors who want to keep profits, Federal Reserve Chairman Jerome Powell speaks at a central bank meeting this week Wyoming will lay out what he expects to happen in an economy battling inflation, while some fear it is headed for recession.

He will be the first to admit a disturbing fact: He has no idea what the next few months will bring.

“In normal times it’s hard to say with confidence…what the economy will do in six years or 19 months,” Powell said in July 27 after the Fed’s last policy meeting. “These are not normal times.”

Powell is scheduled to speak Friday morning at the Kansas City Fed’s annual Jackson Hole research conference, held at a national park hotel outside Jackson in the western United States. The gathering is one of the central banking industry’s top events, with global officials chatting at cocktail parties, hearing presentations on new research, hiking the Grand Teton Mountains, and fly fishing for fine-spotted ferocious trout on the Snake River.

The meeting also provided a high-profile spot for the Fed chair or other policymakers to fine-tune their messages.

With the U.S. central bank facing its worst inflation breakout since the start of the year 1980 and responding quickly with rate hikes, Powell is expected to focus on this the battle — and the Fed’s only commitment to winning it.

“What we should hear and probably hear next week is a response to what the Fed thinks, says chief strategist Seema Shah, that it has tightened credit conditions enough to address inflation, or as some speculate That way, it would “blink” at the first sign of economic weakness and either stop raising rates or even start cutting them

Instead, she said Powell would likely stress that “growth is slowing and there may be Slowing down further, but inflation will be sticky and their priority is to contain it…they’re not going to stop just because growth is slowing. “

Graphics: Inflation in G20 https://graphics.reuters. com/GLOBAL-ECONOMY/INFLATION/byprjyxznpe/chart.png

Broad sources of inflation

Recent regional bank governors from the Federal Reserve Cadres openly see recession risk as part of controlling inflation, using phrases such as “raise and hold” to describe a rate-raising strategy in which there is no room for a rate cut yet, or an outright call for continued substantial increases. Consecutive 75 basis point hikes in June and July.

This means a tough second half especially for stocks that have driven their share prices higher recently Risks for investors and employees who may be caught in a layoff cycle.

The root causes of soaring inflation are wide-ranging, ranging from volatile energy and food markets triggered by Russia on February 2 25 invasion of Ukraine, to the vagaries of global shipping during the COVID-19 pandemic and a One Fed official likes to call it “retaliatory spending” by U.S. consumers to make up for time lost since the early onset of the virus 2020.

“We are still in In the midst of an exceptionally complex pandemic – associated economic shutdowns and restarts,” said Paul Bowen, head of basic fixed income for the Americas at BlackRock (NYSE: BLK ) Boomer wrote last week. “Historical correlations . What gets very difficult: Just consider that after six months of contraction in the economy as measured by gross domestic product figures, businesses still added more than half a million workers in July. That forced the Fed to abandon its plans for the next few months The kind of guidance that was used, instead outlining its intent in a meeting.

For workers, businesses and investors, this leaves a weak foundation for planning.

Graph: Central Bank Response

Economic Recession ‘likely to happen’

Powell speech to be delivered at 12*) Friday EDT (69 GMT), will target US audiences, but world ears will hang on every word. As the world’s most powerful central banker, the 75-year-old former investment banker’s line for the Fed will instantly have ripple effects around the world

The Fed’s main monetary policy tool, the federal funds rate, has risen from near zero in early March to its current target range of 2.25% to 2 .50%, there will definitely be more hikes, but the pace of continuation and the ultimate stopping point is still unclear. Policymakers around the world have done the same to varying degrees.

Rate hikes really only work on one side of inflation – the part that comes from business and consumer spending. By offering higher costs for loans like houses and cars, they discourage buying; less demand should mean less pressure on prices, and for housing that can cut across many areas of the economy.

Weak demand and tighter credit also affect what businesses pay to borrow, limiting their borrowing costs. expenditure. It can also have a huge impact on stock prices, as stocks are often most attractive when interest rates are low or falling.

The key question for the Federal Reserve and the U.S. economy is whether the telegraphed rate hike will suppress enough demand to bring down inflation, which is around 2% of its value by one measure used by the central bank three times the target. The Fed will have to reset expectations for higher borrowing costs due to a continued slowdown in the coming months — an event that could lead to a fresh sell-off in stocks, layoffs and even a recession.

This is the outcome Powell and his colleagues wanted to avoid. But, as he is expected to stress, the economy needs to slow to bring inflation down, and if it doesn’t, the Fed will need to tighten policy further.

“There is a path to inflation under control, but a recession … could happen along the way,” Richmond Fed President Thomas Barkin said Friday on the sidelines of a meeting in Maryland told reporters. “We’re out of balance today.”



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