Powell has a chance to change market expectations in Jackson Hole

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Federal Reserve Chairman Jerome Powell will have a chance – if he wants to use it – to change expectations in financial markets when central bankers gather this week for their annual meeting in Jackson Hole.

Powell spoke on the economic outlook at 10 a.m. Washington time on Friday and is expected to reiterate the Fed’s determination to keep raising interest rates to tame inflation, although he is likely to stop short of signaling how big officials will go when they meet next month.

“This is the most important question of all: How much will Powell manage the microfinance environment? We’ve reached a point where the economy is showing signs of slowing down,” said Laura Rosner-Warburton, senior US economist at MacroPolicy Perspectives in New York. “If we don’t see more slowdown in the data and instead things bounce back, then the Fed will need to be more active in managing financial conditions.”

Powell’s speech will mark the highlight of the two-day conference in Wyoming’s Grand Teton Mountains. The prestigious event, which in the past has been used by Fed chairmen as a venue for key policy announcements, brings together leading policymakers from around the world.

European Central Bank Executive Board member Isabelle Schnabel speaks on a panel on Saturday. Bank of England Governor Andrew Bailey will be among those in attendance, but ECB President Christine Lagarde does not plan to attend.

U.S. stocks rose after the Fed’s last policy meeting in late July amid growing expectations that the central bank will begin to slow the pace of tightening and signs that inflationary pressures may be easing.

Investors were mostly unfazed by policymakers’ strident claims along the way that their fight against inflation is far from over, although the chairman himself has yet to speak after his July 27 post-meeting press conference.

This year, the conference is being held in person for the first time since 2019. Last year, it was moved to a virtual format just days before when the delta variant of Covid-19 swept the country. By then, inflation had risen well above the Fed’s 2% target, but in his address to the forum, Powell stressed that this pressure was likely to be temporary and did not appear to be widespread.

Now, a year later, inflation is near four-decade highs, and Powell acknowledged that the Fed’s analysis was flawed and that policymakers should have started raising interest rates earlier.

Against that backdrop — despite the latest monthly consumer price report giving some optimism that inflation may have peaked — Powell is likely to take a hard line, said Kevin Cummins, chief U.S. economist at NatWest Markets in Stamford , Connecticut.

“They’re so focused on doing this partly because they screwed up last year with the whole ‘transition’ thing and they realize that the only thing they can do now is tighten policy and that will slow down inflation,” Cummins said.

The Federal Reserve raised its benchmark interest rate by three-quarters of a percentage point at its July policy meeting, following an increase of the same amount the previous month. The successive moves marked the fastest rate of tightening since the early 1980s.

Investors currently see similar odds for either a half-point or another three-quarter point hike at the Fed’s Sept. 20-21 meeting. August jobs and consumer price data are due to be released by the Labor Department before then and are likely to be the deciding factor in the selection of Fed officials.

In Europe, policymakers are having a similar debate over how big the next rate hike should be. The ECB has lagged its peers in responding to record inflation and only started raising rates in July. After last month’s half-point increase, many policymakers have yet to signal whether they are leaning toward another similar move in September or a smaller quarter-point move as recession risks rise.

As the only member of the Executive Board attending this week’s conference, Schnabel will speak from a position of authority. Her remarks during a panel on the “post-pandemic policy outlook” may shed light on how the ECB plans to juggle short-term challenges such as persistent high price pressures and a weakening economy with longer-term challenges including climate change.

Beyond the short term, the big question is how high the Fed and its partners around the world will ultimately take interest rates.

Kansas City Federal Reserve President Esther George, whose bank is hosting the annual symposium in Jackson Hole, said Thursday that whether policymakers opt for another big hike next month or begin shifting toward smaller ones, it may be necessary to keep raising rates for a while until they are “absolutely convinced” that inflation is going down.

“How high are you raising rates? I don’t think we’ll find out. We won’t know until we start to see how some of these variables come together — how the supply and demand pieces play out — to know exactly where that tipping point is,” George said. “But I think, as you’ve heard others say, we’re going to have to be very clear that we’re going to have to be absolutely convinced that that number is going down.”

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