Fed's 'raise and delay' inflation bet in focus as Jackson Gap awaits Powell

JACKSON HOLE, Wyo., Aug. 26 (Reuters) – If “raise and delay” sounds like a poker game, it might also sum up the all-in inflation-fighting plan that Federal Reserve Chairman Jerome Powell is expected to deliver in a highly anticipated speech at the central bank’s Jackson Hole conference on Friday. With the intention that it might also throw the Fed off its march toward higher interest rates, Powell’s colleagues leaned on the premise that the U.S. central bank’s benchmark interest rate would no longer delay a hike but would remain at a high level until inflation returned to the Fed’s 2% target.

By the Fed's preferred measure, inflation is currently about triple that.

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“I’m actually going to try to be as resolute as you probably will, when we get to a stage that I think is the right stage, to actually stop there and purposefully analyze and assess how our policies are flowing through the economy,” Atlanta Fed President Raphael Bostic told the Wall Street Journal this week.

“Some weakening should be anticipated” in the economy, he maintained, and “it will be, in fact, above all that we face the temptation to be too reactionary and really make it clear that we have inflation well in its grip for 2% before we postpone any measures to widen the gap in our policy stance.”

Translation: Win is now no longer looking to the Fed to rescue the economy or the unemployed from a modest slowdown.

The feedback from Bostic and varied Fed officials points to a subtle but major shift in emphasis in how the central bank talks about what it’s doing, one that Powell may also be able to perfectly emphasize when he takes the stand at a mountain resort in Jackson, Wyoming at 10 a.m. EDT (1400 GMT).

In recent weeks, Fed officials have veered from the “R” note, saying their hope was to prevent a recession, to downplaying the significance of one, especially in the context of the worst bout of inflation in 40 years. Controlling developments in designated pressures remains their highest level of interest.“I think now that I no longer think the threat of a deep or sustained recession is very high,” Philadelphia Fed President Patrick Harker acknowledged in an interview with CNBC on Thursday. Learn more

The language matches expectations emerging from the UK and several European countries that central banks may continue to raise interest rates even in the face of a slowdown, rather than providing relief in the form of lower borrowing costs that could well boost the economy and employment. To avoid a trade-off between inflation and jobs, a sacrifice they feel they have wrongly made in recent years of low inflation due to a misplaced setback of rising costs, they acknowledge they may not have had more than a few in the latest climate.

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RETURN TO 'CONVENTIONAL' POLITICS?

The duty now is to sell this scrutiny to the general public.

“The labor market is very tight … I think to save some easing in that labor market you would get higher unemployment” because the Fed cools the economy, Kansas City Fed President Esther George told CNBC on Thursday.

The Fed's target lending rate, currently somewhere between 2.25% and 2.50%, could very well perhaps push upwards above 4.00%, George acknowledged, and "we may hold off" for some time as inflation falls.

There will no longer be any guarantees as to how long this may l perhaps also delay or what designation may very well perhaps even be required through poorly placed jobs and outputs.

It would be a memorable second for the Fed, though. The U.S. federal funds rate was above 2.50% in 2008, when the central bank began cutting it in line with the short-lived global financial crisis. Rates generated now have not been regularly held at such a high level since 2006-2007, when a credit rating-fueled housing bubble began to collapse.

The ultimate fallout has become unpleasant: a prolonged, scarring recession, fueled by a banking system meltdown and with a painfully slow recovery in its wake.

The hope this time is that if a recession comes any time soon, it will be shallow, tested by the reality that the economy is healthier, more protected and no longer as prone to the complications that can turn a modest decline into something worse. Businesses and households, meanwhile, are overall much less in debt.

If inflation can be managed without a deep slump, it may even signal a return to a simpler form of central banking, where the peaks and valleys of the business cycle are managed myself with changes in the federal funds rate.

With the onset of the 2007-2009 recession, the Fed lowered interest rates to close at zero for the first time. As it became clear that the economy needed more strengthening, the central bank launched a unique bond-buying program and several initiatives, efforts that were replicated and expanded to combat the pandemic-triggered recession in 2020.

The Fed has spent the last 15 years, of course, remarkably preoccupied with simple ideas for managing policy in “zero taper for sure,” justifying large asset-preference applications of “quantitative easing” to policymakers, researching their effectiveness, and determining simple ideas for exiting them.

Unprecedented will depend on how inflation gradually falls and the intention of rapid unemployment increases.

However, if the latter attempt is successful, the Fed may be about to turn the page on “unconventional” monetary policy making and return to the nothing-more-equivalent way it saw in the 1990s and early 2000s.“They’re going to reset the monetary policy table for a generation where the risks are two-sided on both output and inflation … and that idea that you’re most happy with is worn out,” acknowledged Vincent Reinhart, a Fed official who is now the executive economist at Dreyfus and Mellon. “It would actually be a huge decision.”

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Reporting by Howard Schneider; Enhancement by Paulo Simão

Our standards: The Thomson Reuters Trust Principles.

Howard Schneider

Thomson Reuters

Covers the US Federal Reserve, monetary policy and economics, graduated from the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economics reporter and on the Washington Submit native staff.

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