The Fed Heads West

August 23, 2023

Have you ever been to Jackson Hole, Wyoming? It’s a truly beautiful part of the country. The mountain air, the vast landscape, the stunning view of the Grand Tetons – a perfect place for a late summer vacation.

Countless central bank officials and top academic leaders will make their way to Jackson Hole this week – but unfortunately for them, they are in for anything but a vacation!

They’re headed to the Jackson Hole Economic Symposium, an annual conference focusing on global central banking. For much of its 45 years, this conference has been a calming summer get-together where government officials gathered to discuss policy, economic theories, and outlooks.

Yet in recent history, this pilgrimage has been anything but relaxing and rejuvenating. As you may recall, last year’s conference sent markets reeling as Federal Reserve Chairman Jerome Powell vowed to fight inflation, notwithstanding the resulting economic impact. One journalist referred to last year’s speech as a nine-minute “rifle shot” as Powell was very firm in his remarks and his conviction towards a strong fight again inflation. (You can read our commentary on last year’s meeting here)

Now, twelve months later, its time for Chairman Powell to speak again. His “rifle shot” has proved effective, albeit painful at times – inflation has fallen dramatically (down by more than 60% at headline level) and employment remains strong (unemployment rate at almost a record low). And yet, lots of uncertainty and questions remain.

Powell is set to speak again this Friday August 25th (after this post is published). The speech will give him a chance to articulate his views of the path forward. Market commentators are concerned that the messaging will remain vague (at best) and hawkish (at worst). In recent speeches, Powell has been hesitant to signal any definitive actions too far in advance. Why? He constantly states that the Fed remains “data dependent” and as a result, they need to allow time for the data to present itself. It’s very unlikely he will pre-empt the Fed’s next meeting/rate decision that is coming in mid September, as there is lots of data to come before then.

It’s more likely that he’ll attempt to strike a balance between “progress is being made” and “end is near/rate cuts coming.” In prior meetings, Powell has been very careful to not ignite investor’s animal spirits, guarding against any comments that will lead investors to believe things are too rosy (which could spark an easing in financial conditions that can threaten the work that’s been done)

As noted in recent Fed commentary, many members of the Federal Reserve still see significant inflation risk to the upside. This concern is largely driven by the unrelenting strength in the labor market and the housing market, as well as stickiness in key consumer categories such as food and energy.

Fed officials are also coming to terms with the economic outlook after this current inflation cycle ends. Are we now living in a world that is simply more inflation prone – with supply chain issues, movements towards onshoring, instability overseas, declining immigration, and an aging population? Certainly a lot to consider and discuss.

Chairman Powell will speak later this week but given where we’ve been and where we’re headed, this is surely just the start of the conversation.

Onward we go,

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