© Reuters. FILE PHOTO: Federal Reserve Chair Jerome Powell takes his seat to testify before a Senate Banking, Housing and Urban Affairs Committee hearing on “The Semiannual Monetary Policy Report to the Congress” on Capitol Hill in Washington, U.S., July 15, 202
(Reuters) – The stakes for Federal Reserve Chair Jerome Powell when he delivers a speech on Friday, his fourth at the influential Jackson Hole economic symposium hosted each August by the Kansas City Fed, could not be much higher. Investors and traders will hang on his every word, from his assessment of the progress in the labor market and his outlook for inflation, to any details on when and how he’d expect to start trimming the central bank’s support for the economy. Perhaps even more importantly, his words will be scrutinized by a White House considering whether to keep him for another four years, or nominate another leader to take over when his term expires in February. “It’s an opportunity for him. If he really impresses people that he’s on top of all this, then that could really smooth the way for his reappointment,” says Dartmouth College’s Andrew Levin, an adviser to former Chair Janet Yellen and who in recent weeks has publicly advocated for a change in Fed leadership. Yellen, who is now Treasury Secretary, has reportedly told senior advisers to President Joe Biden that she backs reappointing Powell. Here are three approaches Powell may take in his speech: UNEVEN OUTLOOK The highly contagious Delta variant of the coronavirus has set off a fourth wave of the pandemic in the United States, and for some regions – like much of the South – it has become the worst yet. Assessing its impact is one way Powell could go. For example, infections, hospitalizations and deaths in Florida, the country’s fourth-largest state economy, are all at record highs. High-frequency data indicators of consumer behavior show marked drop-offs in restaurant bookings and retail foot traffic there. Still, those declines more likely represent “a loss of momentum rather than a pullback in economic activity,” Jefferies (NYSE:) Chief Financial Economist Aneta Markowska wrote this week. That dovetails with the line Powell and his colleagues have taken this summer: that consumers and businesses have learned to navigate the riskier health environment. Nearly 1.9 million jobs were created in June and July, though that pace may have moderated in August. Still, many economists expect employment to fully recoup the 22 million jobs lost to COVID shutdowns in 2020 by next year. Overall, the economy has more than retraced the drop in output, and while some economists have lowered estimates for the current quarter, they are merely shifting growth into later periods rather than wiping it off the board. Nodding to all that would put Powell in position to reiterate that the Fed is making progress – perhaps “substantial further progress” – toward its goals of full employment and 2% inflation. Clearing that hurdle sets the stage for the start of the “taper” later this year, when the Fed is expected to slow its $120 billion a month of bond purchases aimed at keeping rates low and supporting the economy. “Substantial further progress” for the Fed? https://graphics.reuters.com/USA-ECONOMY/FEDPROGRESS/yzdvxmmmdpx/chart.png TAPER TALK Powell may decide to use the speech to shape expectations around when and how the taper may play out. A number of the Fed’s more hawkish policymakers engaged in their own effort on that score Thursday, with the heads of three regional banks all stumping for a quick start to the taper. Other policymakers have previously said they’d prefer to see a few more months of data, given the Delta surge. Fed policymakers meet to discuss their next moves in mid-September. Even if he doesn’t offer any new details, Powell may take the opportunity to remind investors that a reduction in asset purchases is separate from an interest rate hike. The Fed has set separate hurdles for that, and Powell has previously said those will not be met for quite a while. With inflation already running well above target, a growing number of policymakers concerned it may not recede as quickly or definitively as previously expected, and employment still well short of the labor market’s true capacity, the Fed may face tough choices ahead. Fed’s communications report card https://graphics.reuters.com/USA-FED/COMMUNICATIONS/jbyvrznqnve/chart.png IT’S THE FRAMEWORK, STUPID Powell could push back against emerging criticism of the new framework, which allows for more tolerance for above-target inflation in deference to allowing the economy to run “hot” long enough to foster the kind of robust labor market that had taken hold just before the pandemic. Powell unveiled the framework at last year’s Jackson Hole conference when the biggest threat to recovery was seen to be the enormous jobs hole left by COVID. Few, if any, policymakers imagined inflation – then running at barely half their target – would emerge so quickly as a force to be reckoned with, perhaps at the expense of completing their work helping the job market fully rebound. Powell could argue that jobs and inflation are not in conflict, that they are not on course for an either-or moment when policymakers must sacrifice the one to contain the other. Many of the factors driving inflation now do appear connected to the task of restarting a $20 trillion economy, and some – like used car prices – are already showing signs of moderating. Moreover, even those inside the Fed most anxious about inflation concede the last several months of rapid price increases have not resulted in a material lift to inflation expectations, which should anchor a return to a more palatable inflation situation.
Even this approach comes with some risk, potentially leaving Powell to look defensive about rather than confident in his new policy blueprint. And addressing the issue at all could be a tacit acknowledgement of a deeper debate underway. On the first anniversary of the framework, though, it’s arguably the moment for a full-throated defense of a change in monetary policy that will define Powell’s legacy if it works, and which has been a key reason even some of the most progressive allies of Biden support his renomination.