Powell Breaks No New Ground In Bland Jackson Hole Speech

If the US economy continues to grow at an above-trend pace, the Fed may be compelled to tighten policy further.

That’s according to Jerome Powell, who appeared to break little new ground in Jackson Hole on Friday.

Headed into Powell’s marquee speech, there was some speculation that the Chair might use the occasion to make a grand pronouncement about a higher r-star or otherwise suggest the Committee is poised to lift its assessment of the long run neutral rate. In short: Some wondered if Powell might confirm that the macroeconomic landscape shifted in the wake of the pandemic, with far-reaching implications for policy.

I said Thursday that a big unveil of that sort was exceedingly unlikely. And Powell offered nothing of the sort. Real rates are positive, he said, and well above most estimates of the neutral rate. “We see the current stance of policy as restrictive, putting downward pressure on economic activity, hiring and inflation,” he mused, adding that officials “cannot identify with certainty the neutral rate.”

The Fed is attentive to signs that the US economy isn’t cooling as you might expect given both the scope and rapidity of rate hikes this cycle. Getting to 2% inflation probably requires below-trend growth, Powell reiterated, insisting, as ever, that the Fed will “keep at it until the job is done.” 2% “is and will remain our inflation target,” he emphasized.

Powell nodded to long and variable lags. There may still be significant drag from the rate hikes delivered over the past 16 months, he remarked. And yet, the Fed is prepared to raise rates further if that’s appropriate. “Two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal,” he said. There’s a long way to go before the Fed can declare victory.

He alluded to a less asymmetric balance of risks. “Given how far we have come, at upcoming meetings we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks,” Powell told the crowd.

“There is always uncertainty” about the effectiveness of the Fed’s policies on bringing down inflation, he went on. Given that, the Committee “will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data.”

He referred to policy as “restrictive” multiple times, underscoring the notion that the Fed isn’t prepared to suggest that the neutral rate is meaningfully higher, where that means high enough to render current policy settings ineffectual at cooling the economy.

I’m sorry, but there was nothing to Powell’s address. As I put it Thursday evening, “market participants should probably prepare for a ‘something for everyone’ speech, designed specifically not to rock any boats.” That’s exactly what Powell tried to deliver.

Describing the Fed’s efforts to achieve the right balance between tightening enough to curb inflation but not so much that the economy contracts, he said policymakers “are navigating by the stars under cloudy skies.”