To The Moon

Key Highlights from Fed Chair – Jackson Hole Economic Symposium

The venue, Jackson Hole providing a serene environment for focused discussions with the symbolic significance of retreating from the noise of financial markets to discuss broader economic issues. The primary purpose of the symposium is to bring together central bankers, financial experts, academics, and policymakers from around the world to discuss important economic and financial issues. The symposium serves as a platform for participants to exchange ideas, share research findings, and engage in discussions about current and future challenges facing the global economy.

Following the transcript’s highlight:

Although inflation has moved down from its peak—a welcome development—it remains too high. We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.

While these two forces (pandemic-related demand and supply distortions and on our tightening of monetary policy) are now working together to bring down inflation, the process still has a long way to go, even with the more favorable recent readings.

Food and energy prices are influenced by global factors that remain volatile, and can provide a misleading signal of where inflation is headed. In my remaining comments, I will focus on core PCE inflation, which omits the food and energy components.

To understand the factors that will likely drive further progress, it is useful to separately examine the three broad components of

i. core PCE inflation—inflation for goods,

ii. for housing services, and

iii. for all other services, sometimes referred to as nonhousing services.

Core PCE Inflation:

Core goods prices fell the past two months, but on a 12-month basis, core goods inflation remains well above its pre-pandemic level. Sustained progress is needed, and restrictive monetary policy is called for to achieve that progress.

Housing services:

Going forward, if market rent growth settles near pre-pandemic levels, housing services inflation should decline toward its pre-pandemic level as well. We will continue to watch the market rent data closely for a signal of the upside and downside risks to housing services inflation.

Nonhousing services:

Nonhousing services, accounts for over half of the core PCE index and includes a broad range of services, such as health care, food services, transportation, and accommodations. Twelve-month inflation in this sector has moved sideways since liftoff. Inflation measured over the past three and six months has declined, however, which is encouraging.

The Outlook – Economic growth

Getting inflation sustainably back down to 2 percent is expected to require a period of below-trend economic growth as well as some softening in labor market conditions.

We are attentive to signs that the economy may not be cooling as expected. So far this year, GDP (gross domestic product) growth has come in above expectations and above its longer-run trend, and recent readings on consumer spending have been especially robust. In addition, after decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up. Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.

The Outlook – Labour market

Even as nominal wage growth has slowed, real wage growth has been increasing as inflation has fallen. We expect this labor market rebalancing to continue. Evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response.

Uncertainty and Risk Management along the Path Forward

Two percent is and will remain our inflation target. We are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive to bring inflation down to that level over time.

That assessment is further complicated by uncertainty about the duration of the lags with which monetary tightening affects economic activity and especially inflation. Since the symposium a year ago, the Committee has raised the policy rate by 300 basis points, including 100 basis points over the past seven months. And we have substantially reduced the size of our securities holdings. The wide range of estimates of these lags suggests that there may be significant further drag in the pipeline.

Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment. Doing too much could also do unnecessary harm to the economy.

Conclusion

We will assess our progress based on the totality of the data and the evolving outlook and risks. Based on this assessment, we will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data.

In a recent article, we connected the dots to help explain the factors contributing to the current high-interest rate environment and bank runs. We also provided insights into the risks and future opportunities that lie ahead using the 'Quantamental' approach.

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