Jackson Hole

Issue 85

The Federal Reserve’s annual economic conference takes place this week.  Jerome Powell has confessed that he’s anxious about the outlook as complaints about rising prices pile up. And he’s hedged his bets in case he’s proven wrong, warning that policy makers would shift course to assure, as he said last month, “we won’t have an extended period of high inflation.” Powell has already initiated formal talks on a path toward pulling back on the central bank’s massive bond buying program, a schedule he may offer more perspective on this week. Most Fed officials last month judged that it likely would be appropriate for the reductions to start this year.

The Fed is likely going to stay the course in allowing inflation to rise and support the economy in helping to keep unemployment low, previously something that really wasn’t ever the Fed’s job.

“flexible average inflation targeting,” the stratagem Powell unveiled last year turned the Fed’s traditional approach to managing the economy on its head. The central bank’s focus has shifted from trying to contain inflation at 2% to actually fostering it, with the explicit objective of having it run moderately above that pace for a time to make up for years of being below it.

The framework also does away with the Fed’s long-standing tactic of launching pre-emptive strikes against inflation — a strategy that dates back to the late William McChesney Martin, who ruled the Fed from 1951 to 1970 and famously quipped that it was the central bank’s job to “take away the punch bowl just as the party gets going.”

What we can expect from this meeting is for rates to go unchanged, an unwinding of emergency asset purchases at the eve of the pandemic last year and continued liquidity support to capital and credit markets.

Source: CNBC