Now, returning to Jackson Hole, Wyoming, Powell will have to convince markets he means business when he speaks at Friday’s landmark conference of economists. If he can’t, it could undermine the Fed’s efforts to stem the price spikes that have rattled the economy, pushed consumer sentiment to record lows and damaged President Joe Biden’s approval ratings.
“There are no easy answers,” said Torsten Slok, chief economist at private equity firm Apollo Global Management. “The Fed is very concerned about sending the right signal.”
Stock prices have been mixed for the past few days in anticipation of Powell’s tough talk, but if his tone is softer than expected, the uptrend is likely to return.
Investors always pay attention to what the Fed chair said at the conference, which in the past has served as the stage for crucial policy changes. But Powell’s comments carry particular weight this year as the Fed considers how high to push interest rates to bring down inflation.
The Fed’s efforts to communicate with investors have been strained over the past year. Central bank officials first had to understand that inflation would last longer than they initially thought before embarking on the most aggressive rate hikes in 30 years. And the pandemic-era economy has proven particularly unpredictable, prompting Powell to almost completely back away from his practice of providing long-term guidance on what the central bank might do.
Both high inflation and confusion have exposed the institution to criticism.
Mohamed El-Erian, Allianz’s chief economic adviser, accused the central bank of failing to anticipate how stubborn inflation would be, failing to act sooner to raise interest rates and making rosy predictions about where the economy was headed could.
“Chair Powell must reset market interest rate expectations, avoid last year’s mishaps and begin to repair the institution’s damaged credibility,” he said.
However, investor signals are also mixed: market expectations for rate cuts next year could reflect either pessimism or optimism. Investors may expect the Fed to overdo it and cause a full-blown recession, causing it to reverse interest rates. Or they expect that the central bank will manage to lower prices while avoiding a recession altogether.
Whatever the case, markets pricing in a Fed reversal could do the opposite: the central bank may need to raise rates even more to counteract its exuberance, making the path to lower inflation all the more painful for the economy.
“I’d love to hear him reinforce his commitment to getting inflation under control because that’s obviously at the heart of everything they do,” said Omair Sharif, founder of independent research firm Inflation Insights.
Still, some Democratic policymakers in Washington want to hear at least a gist of a plan to begin easing rate hikes. Sen. Elizabeth Waren (D-Mass.) argues that there’s not much the Fed can do about many of the key drivers of high inflation anyway — including supply chain disruptions and higher oil prices — and so should avoid dragging the economy down.
At the time of the Fed’s last rate hike in July, central bank policymakers agreed that further tightening would likely be needed to cool rising prices, but expected they would eventually slow down and take stock of the extent of their actions have alleviated inflation, so the minutes of this meeting. Many of them also cited the risk that the central bank could go too far.
This was at the height of fears that the economy was already entering a recession. Since then, a body of data has shown the strength of both consumer spending and the labor market, which are the main sources of economic health.
“I think we’ll hear [Powell] Go back a bit to the pessimism in the recession risk logs,” said Adam Ozimek, chief economist at public policy research firm Economic Innovation Group. “The data doesn’t point to anything like a recession.”
Pleading for a more optimistic approach to the economy’s path, Ozimek said jobs are being created at a rapid pace and this is helping production – the supply of goods and services – better match demand, leading to ever-increasing needs should dampen prices.
But, he said, the more successful the central bank is in trying to slow the economy, the harder it becomes to tell if the Fed has already gone too far.
Apollo’s Slok said the biggest long-term question about how quickly the Fed will be able to tame inflation is what’s driving it in the first place.
“We and they don’t really know exactly why inflation has gone up and therefore how fast it’s going to go down,” he said. He also noted that the Fed doesn’t know exactly how high rates need to go before they really start trickling into growth.
Joseph Wang, a former senior trader at the New York Fed who now blogs, said this is what makes the Fed’s news so grim.
“I can understand why the market is confused,” he said.