Comment For months, the Federal Reserve was under increasing pressure to control inflation without tipping the economy into recession. On Friday, Chairman Jerome H. Powell will lay out his plan for how the central bank could achieve this. Policy makers, economists markets and people in the United States — and the world — eager for any hints about the Fed’s upcoming rate hikes and its broader outlook for the economy. Powell’s remarks, delivered 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 biggest problem while maintaining signs of strength, particularly the still turbulent labor market. Jackson Hole: Where Fed officials congregate and workers can’t afford to stay Powell’s much-anticipated speech will also be crucial to his own credibility. In statements about last year’s conference, doubled down on his belief that the 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. “One way you assert yourself as a bus driver is to clearly state what you did wrong, explain why you did it wrong, and communicate how you will do things differently in the future.” US policymakers misjudged inflation threat until it was too late To bring inflation down from 40-year highs, the Fed must rely to a powerful tool: interest rates. Higher interest rates are designed to slow demand, making many loans, such as auto or home loans, more expensive. The housing market, for example, is cooling as rising mortgage rates force would-be homeowners to cave. Inflation eased slightly in July to 8.5% from a year earlier — down from the previous month’s high — as a fall Natural gas prices helped the decline total cost. But Fed leaders say they need to see months of continued improvement before they know if rate hikes are having an effect. The compounding challenge is that rate hikes operate with a lag, and the increases the bank is making now could slow economic activity later this year or early next year. Already, the US economy shrank in the first two quarters of 2022, raising fears of a recession and suggesting the economy is already slowing noticeably, even as inflation remains high. Inflation eased in July from a year ago as energy prices eased “July looked like there was some easing in those price pressures, but it certainly wasn’t enough to say, ‘we’re headed in the right direction,’” Kansas City Fed President Esther George told Yahoo Finance on Thursday. “So I think we have more data to look at. And I think we have more work to do to start seeing that trend reverse.” Part of the problem is that interest rates are a crude tactic, and they do it cannot address all the ways in which people experience inflation in their daily lives. Rate hikes can’t build new homes or keep gas prices low. And they can’t boost consumer sentiment, especially at a time when many families and business owners don’t feel like the economy is working for them, despite a strong labor market and resilient consumer spending. Politically, high inflation has weighed on the President Biden’s approval ratings have complicated the Democratic Party’s legislative agenda. This is not strictly a problem for the Fed, which is designed to be independent and whose officials serve terms not directly aligned with presidential administrations. However, it puts the central bank’s work under closer scrutiny by politicians. Earlier this month, the White House and congressional Democrats secured a major victory by passing the Inflation Reduction Act, which focuses on the climate crisis, lowering health care costs and raising taxes on big corporations. But Republicans continue to hammer Democrats for big stimulus packages earlier in the pandemic and argue that any further federal spending or cancellation of student loan debt will further overheat the economy. Fed raises rates by three-quarters of a percentage point to fight inflation For the Fed officials who descended on Jackson Hole this week, the past few years have been dizzying. It remains extremely difficult for officials to get a clear read on the economy. And the cost of getting those assessments wrong was high. In last year’s Jackson Hole speech, Powell laid out his reasons for believing that inflation would be a temporary feature of the economic recovery from the recession caused by the pandemic. The Fed was edging closer to easing some of its emergency support for the economy, but rate hikes were far from likely. Powell also gave his speech virtually, as the summit was canceled during the outbreak of the delta variant of the coronavirus last summer. Twelve months later, and now back in Jackson Hole for the first time since the pandemic began, the Fed is in a race to rein in inflation that has risen and spread further throughout the economy. Supply chain grunts, high consumer demand and Russia’s invasion of Ukraine have kept prices high for gas, groceries, rent and everything in between. And suddenly, the central bank he has the most aggressive walking pace in decades. The Fed has raised interest rates four times this year, most recently by three-quarters of a percentage point in July. The widespread expectation is that more hikes will follow and the Fed will raise rates again at policy meetings in September, November and December. However, it is unclear whether central bankers will go along with such sharp hikes or whether they will decide to limit the hikes to avoid slowing the economy too sharply and triggering a recession. It would be unusual for Powell to use his speech to say exactly what the Fed plans to do next month. However, markets are watching closely for any signs of what’s to come. Stocks could find themselves on Friday if Powell is more bullish or more relaxed than expected. “He wanted to tell a somewhat hopeful story: ‘this is something we can do,’” said Tim Duy, a Fed expert at the University of Oregon and chief economist at SGH Macro Advisors. “We know inflation hurts all of you and we want to fix this situation, but we don’t want to do it in a way that causes more pain.”
