Fed's 'expand and preserve' inflation bet in focus as Jackson Gap awaits Powell

By Howard Schneider and Ann Saphir

JACKSON HOLE, Wyo. (Reuters) – People are headed for a painful period of financial distress and possibly rising unemployment as the Federal Reserve raises interest rates to combat high inflation, U.S. central bank Chairman Jerome Powell warned on Friday in his bluntest language yet about what’s in store for the country’s buoyant economy.

In a keynote address to the Jackson Hole central banking convention in Wyoming, Powell acknowledged that the Fed would expand rates as high as it wanted to restrict transmission and would keep them there “for a while” to reduce inflation that is working in more ways than one of the Fed’s 2% goals.

“Reducing inflation may require a sustained period of below-market inflation,” Powell acknowledged. “While high unemployment rates, slower inflation, and softer labor market conditions will reduce inflation, they will also bring some misery to households and businesses. These are the uncomfortable costs of lowering inflation. But failure to restore inflation stability would mean much more misery.”

As that misery will increase, Powell acknowledged, we might not expect the Fed to dial back its monetary policy quickly unless inflation self-discipline is in place.

“I think the message has come through firmly and appropriately,” Cleveland Fed President Loretta Mester acknowledged in an interview with Bloomberg TV after the speech. “I say we’re going to want to run (non-permanent interest rates) above 4% and maybe we should keep them there next year.”

Certainly, Powell’s remarks summed up the important state of affairs happening not only to the right Fed policymakers, but also to a bunch of dozens of other country’s central bankers in Jackson Gap who are frantically trying to address the worst bout of inflation in four or more years.

Some traders expect the Fed to pull back if unemployment rises too quickly, with some even projecting hobby price cuts next year.

For now, Powell and a number of policymakers are signaling that even a recession wouldn’t bother them if inflation wasn’t driving the Fed’s easing goal. Powell gave no indication Friday that rates could rise sooner than the Fed plans to, as long as they go as high as they want.

“The old list strongly cautions against the policy of easing input,” Powell acknowledged. “We should be content with that, except that the job is done. History shows that the employment costs of reducing inflation tend to increase with extension.”

Underscoring the same “expand and preserve” message amid accusations of philanthropy, Atlanta Fed President Raphael Bostic told Bloomberg TV that with the central bank’s policy price 100 to 125 basis points higher than the recent 2.25%-2.50% range, “we’ve been waiting to end up there for a very long time.”

After Powell, hobby price futures traders increased bets on a third consecutive 75 basis point hike at the Fed's Sept. 20-21 policy meeting and priced in expectations that the policy rate will be priced in to the range of 3.75%-4.00% by next March.

Powell’s frank acknowledgement of the misery coming to households “took traders by surprise and hammered home how serious they are about raising rates to combat inflation,” acknowledged Ryan Detrick, chief market strategist at Carson Community. “Hopes for a dovish pivot have been crushed, at least for now.”

But futures trading has held up as expectations for such a pivot are weighed next year, with the Fed considering reducing its policy rate by about 40 basis points by the end of 2023 and more in 2024.

The Fed will get another chance to reset those expectations in September, when its 19 policymakers release an unusual range of company forecasts alongside their incoming price increases.

Input files

Powell did not specify whether the Fed would stick with a 75 basis point hike or scale back to a half-basis point at its policy meeting next month, except to say the choice would depend on the “totality” of the tips up to that point.

New personal filings have shown some meager decline in inflation, with the Fed’s closely watched personal consumption expenditures stamp index falling in July to 6.3% on an annual basis, down from 6.8% in June. Inflation expectations according to the University of Michigan’s measures have even declined personally.

But “a single-month increase falls far short of what the Committee should study before we are confident that inflation is moving lower,” Powell acknowledged, referring to the central bank’s Federal Reserve Committee’s “equilibrium” given job openings are far more likely than the unemployed to pick up.

The decision on how much to raise rates “will depend on the totality of the files received and the evolving outlook,” Powell acknowledged, with more jobs and inflation reports to come. , with a premium of 3.5%, a level that has not been stronger in more than 50 years.

To rein in inflation, however, Fed policymakers have acknowledged that they must tighten controls on goods and services, raising borrowing costs and making it more expensive to finance homes, cars and other investments. As the task becomes more difficult, because there is a long way to go, particularly in the housing market, companies may need to regulate their hiring plans or even resort to layoffs.

Philadelphia Fed President Patrick Harker, in an interview with Bloomberg TV, acknowledged that the Fed needs to stop crushing the job market and sought to reassure people who are experiencing an imaginable double whammy of rising unemployment and high inflation.

“If there is a recession, it may be shallow,” Harker acknowledged.

Extra grounded eats

Powell delivered his speech to a roomful of global politicians and economists gathered at a mountain hotel to focus on how the COVID-19 pandemic will impose new restrictions on the economy, and the implications for central banks. It could affect global markets. It also fit with the message being preached by a number of major central banks: High interest rates are meant to loosen economies, and the effort to expand them will not be waived unless inflation falls.

Certainly, some European Central Bank policymakers want to focus on a 75 basis point hike in the price of the hobby at a policy meeting next month, even though it raises the likelihood of a recession, sources with files on the job dispute told Reuters.

“Central banks must act decisively to bring inflation relief to bear and anchor inflation expectations,” Gita Gopinath, first deputy managing director of the Global Monetary Fund, told conference attendees on Friday. In previous appearances at the Jackson Hole conference, Powell’s personal remarks have been a lively addition to high-level discussions of the Fed’s policy and outlook.

He acknowledged this in his opening remarks. But with the Fed trying to protect markets and the public well-informed about what is to come in due course, he acknowledged that the depth of the second required a more reasoned approach.

“Right now, my comments will be shorter, my point of interest narrower and my message more contested,” Powell acknowledged.

(Reporting by Howard Schneider; Additional reporting by Mehnaz Yasmin; Editing by Chizu Nomiyama and Paul Simao)

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