Jackson Hole and the Chairman

Federal Reserve Chairman Jerome Powell will be making a speech later tonight (in AEST), the chairman will be delivering a monetary policy review statement at the annual Jackson Hole conference. Some have already pegged it ahead of schedule to be quite memorable, with meaningful comments on policy to be made and potentially significant changes to how the Fed tackles inflation. Chairman Powell’s speech will be heavily scrutinized by economists, investors and traders looking for the next steps by the Fed towards monetary policy.

Throughout the pandemic, the Fed cronies have been providing untapped stimulus for the economy, and the current policy trajectory shows little indication that it is likely to stop. Analysts are exploring the idea that the Fed has created a new bubble with many putting the tech sector under the microscope. The stipulation is that much of the market rally in equity markets have been propped up from vast sums of stimulus being pumped into the economy.

At the last Fed meeting, little was discussed about inflation policies, which made many an investor took a step back in disappointment. For tonight’s speech, Powell is expected by some to address how policy on inflation may change, and in doing so, to also justify why the policies intended will be the best fit for the economy.

Another possibility that is under speculation, and that could be on the cards for Powell’s speech, is for him to address potential changes to the policy framework altogether. The Dual Mandate mentality that the Fed has incorporated since the 1970s could be up for some changes, moving towards a mandate that is more reflective of the times. Logically the introduction of the dual mandate was during a time where the economic conditions where polar opposite to today, inflation was running rampant, along with unemployment.

I agree that some level of an update to the mandate should be considered, especially with the difficulties that the Fed seem to be having to be able to increase inflation and restart the economy. Both measures require different action to invoke growth, and the balancing act has not worked to the best of its ability for some time. So perhaps the idea of focusing on one aspect at a time may be more beneficial to the US economy, it would enable the Fed to be much more flexible and reactive to the economic environment.

Right now, the actions on holding interest rates at lower levels have worked, but maintaining rates for extended periods fosters growth in areas not incredibly exciting for economic growth. With the Feds expectations to keep rates near 0% over the next year and potentially a much longer, then rising inflation is going to be a severe concern for economic development. The last time this tactic saw use was in the 1940s, and inflation learned to fly, so clipping the wings and adopting a new mandate or introducing inflation to controls will be necessary.

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