Powell Jackson Hole speech to discuss inflation, Fed rate hikes

On Aug 26, 2022

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For months, the Federal Reserve has been under growing pressure to control inflation without jerking the economy into a recession. On Friday, Chair Jerome H. Powell will map out his plan for how the central bank could pull that off.

Policymakers, financial markets and people around the United States — and the world — are eager for any hints about the Fed’s upcoming interest rate hikes and its broader outlook for the economy. Powell’s remarks, to be given Friday morning at the annual Jackson Hole Economic Symposium, will be key to the public’s understanding of how the Fed can rid the economy of its largest problem while preserving signs of strength, notably the still-churning job market.

Jackson Hole: Where Fed officials gather, and workers can’t afford to stay

Powell’s much-anticipated speech will also be crucial for his own credibility. In remarks for the conference last year, he doubled down on his belief that inflation would be temporary. The speech did not age well.

“The Fed feels like a passenger on the bus, along with Wall Street and investors and economists. The Fed doesn’t feel like the driver of the bus,” said Michael Strain, director of economic policy studies at the conservative American Enterprise Institute. “A way that you assert yourself as a driver of the bus is by stating clearly what you got wrong, explaining why you got it wrong, and communicating how you’re going to do things differently in the future.”

U.S. policymakers misjudged inflation threat until it was too late

To lower inflation from 40-year highs, the Fed must rely on one powerful tool: interest rates. Higher rates are designed to slow demand by making a host of loans, like for cars or mortgages, more expensive. The housing market, for example, is cooling, as a run-up in mortgage rates causes aspiring homeowners to bow out.

Inflation eased a bit in July, clocking in at 8.5 percent compared with the past year — down from the previous month’s high — as dropping gas prices helped lower overall costs. But Fed leaders say they need to see months of sustained improvement before knowing if rate hikes are working.

Compounding the challenge is that rate hikes operate with a lag, and the increases the bank makes now could slow down economic activity later this year or early next year. Already, the U.S. economy shrank in the first two quarters of 2022, raising fears of a recession and suggesting the economy is already slowing markedly, even while inflation remains high.

Inflation eased in July from a year ago, as energy prices fell

“July looked like there was some easing in those price pressures, but certainly not enough that you would say, ‘we’re in the right direction,’” Kansas City Fed President Esther George told Yahoo Finance on Thursday. “So I think we have more data to see. And I think we have more work to do, to begin to see that trend move down.”

Part of the problem is that interest rates are a blunt…