As is customary, the FOMC chair Powell led off the prestigious conference held by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming. In his August 23 keynote speech, he suggested, in a decisive break from his usual practice, that a rate cut was likely at the FOMC’s September meeting. Normally, committee members are very careful about telegraphing policy. More on this in a minute, but first a few words are in order about the conference itself.
The symposium has been held for 47 years and is a widely sought invitation. I have been fortunate to be able to speak to the conference on two occasions and have attended many times. In addition to speeches by world central bankers, academics, and policy makers, the gathering affords ample time for hikes in the Grand Teton National Park, where the conference is held at the Jackson Lake Lodge, and for raft trips on the Snake River. A lot can happen on those raft trips. For example, the general counsel under Paul Volcker was Michael Bradfield. Mike had difficulty adjusting to the board culture and was not well received by the board staff. One time he fell overboard during a conference raft trip, lost his glasses, and had to spend most of the time unable to read or see clearly. Numerous board staff in attendance all claimed responsibility for “helping” Mike into the water.
In his speech at the conference last week, Chairman Powell provided a detailed overview of the economy since 2019 and the extreme impacts the Covid crisis had on inflation, employment, and economic growth. He stated that supply distortions due to the pandemic have waned significantly, the labor market is not overheated anymore, and conditions are less tight than prior to the pandemic. In addition, inflation has declined significantly, and the balance of risks has changed, with risks related to inflation now on the downside and risks to unemployment on the upside.
In particular, he delved into many of the key factors that impacted inflation and how the committee initially viewed the inflation pressures as being temporary due to supply chain disruptions, but that has changed over time. He made two significant statements when viewed in the context of his previous press conferences and guidance he has provided in the past. First, he stated that “My confidence has grown that inflation is on a sustainable path back to 2%.” The state of “confidence” has been a key element in both his and the committee’s view as to when it might be time to change the course of policy. Second, about a third of the way through the speech, he stated: “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend upon incoming data, the evolving outlook, and the balance of risks.” Clearly, Chair Powell was teeing up a start of the rate-cutting process at the September FOMC meeting.
Incoming data since the speech also point decisively to a September cut. The revised second-quarter GDP numbers are in and now stand at 3% year-over-year compared with the initial estimate of 2.8%, suggesting underlying strength in GDP growth and indirectly implying support for the labor market. In addition, we just got the July number for the Fed’s target PCE Price Index. It remained steady at 2.5%, the same as it was in June, and down from 2.7% in April and 2.6% in May.
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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