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What Jerome Powell Said at Jackson Hole

The Fed couldn’t be clearer about continued long term dovish monetary policy.

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This episode is sponsored by NYDIG.

The Kansas City Fed’s annual Jackson Hole Economic Symposium is sort of like TED for Central Bankers. In the lead-up to this year’s event, the conversation has been totally focused on whether or not Fed Chair Jerome Powell would signal a beginning of tapering of dovish support. NLW breaks down the expectations and Powell’s words to glean a picture of the monetary policy likely to come.

“The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Tidal Wave” by BRASKO. Image credit: Michael Nagle/Bloomberg/Getty Images, modified by CoinDesk.

Transcript

What’s going on guys, it is Friday, August 27, and today is one of the big days for central bankers. It’s the day of the annual Jackson Hole Economic Policy Symposium. This is an event that the Kansas City Fed holds each year and as I mentioned earlier in the week, it’s sort of like TED but for central bankers, it’s a chance for them to get a little bit more big-brained and meta than normal policy speeches. That can be making big, wild arguments like outgoing Bank of England Governor Mark Carney did a few years ago, he proposed the end of the U.S. dollar as reserve currency and the introduction of what he called a “synthetic hegemonic currency.” Effectively John Maynard Keynes’ idea of a bank core which he proposed at Bretton Woods as an alternative to U.S. dollar hegemony and effectively, Libra without Facebook.

However, Jackson Hole can also be a chance to signal a new direction in monetary policy for those in power. That is certainly why there has been so much anticipation this year around the Jackson Hole event. The question on everyone’s minds, indeed, the question that has been on everyone’s minds for some time, is when the taper begins. Now, taper refers to the idea of the Fed starting to pull back its incredibly dovish monetary policy. That would mean reducing bond purchases and especially eventually raising interest rates. The word taper itself also references the famous taper tantrum, where markets got extremely mad at the pullback of QE after the great financial crisis. Throughout much of this year, there has been disagreement between the Fed and the markets around how long the Fed can sustain current policies. Basically, the Fed has said that there is still a ton of work to be done, particularly around employment. The market has said yeah, but dude, things are roaring, we’re going to inflate, your hands are going to be forced, as that seemed to bear out in numbers.

The Fed started using the word that has come to be such a monetary meme, “transitory,” all the inflation we’re seeing, all the dislocations, the supply chain issues like we talked about yesterday, all transitory. Now, there were absolutely base effects at play for part of this year’s reporting. What that means is that when you look at year-over-year numbers from, say April and May 2020, at the peak of pandemic lockdowns, to April in May of this year, it’s not just growth in prices on the 2021 side that will show up in the rate of change. It’s also the crater of economic activity reflected in those base numbers from a year ago. That said, every month that goes on those base effects matter less than less. Another argument that has come up is that a lot of the inflation is reflective of transitory dislocations around supply chains. However, as you heard yesterday, it appears increasingly that many of those dislocations aren’t transitory at all. Not only are there still shortages, but they’re showing up in prices. TSMC, the world’s biggest chip manufacturer, is raising prices between 10 and 20%, just as one example.

Does this mean that the Fed was destined to announce a taper at this year’s Jackson Hole event? Well, not so fast. First of all, there’s the question of employment. Jobless claims are at pandemic lows, but there remains serious questions of uneven returns. More on that in a bit. There’s also the question of course of Delta with resurgent COVID case loads weakening the recovery, does that create justification for continued delays in the tapering? Let’s take these in turn. On the uneven side, the theme of the event is literally macroeconomic policy in an uneven economy. Earlier this summer, in testimony, Powell said that “joblessness continues to fall disproportionately on lower wage workers in the service sector, and on African Americans and Hispanics.” This has led many like JPMorgan economist, Michael Rowley to think that because the very theme of the symposium is about the uneven economy, it may be a chance for Jay Powell to elaborate on the Fed’s employment goals, which are broad based and inclusive to use their words.

What about Delta? Well, first of all, it caused the conference organizers to switch from in person to virtual, and that change only happened on August 20th. This has led some to be less sure that there was going to be a tapering announcement. Brett Ryan, a senior U.S. economist at Deutsche Bank Securities said: “You don’t want to rush through tapering or rushing to rate hikes when Delta is still a threat. And there’s potential signs of some slowing in certain indicators at the moment.” Michelle Meyer, the head of U.S. economics at the Bank of America said: “In the last six weeks, there’s been a clear moderation in consumer spending, particularly leisure services spending; so airfare spending, lodging, cruises and entertainment and to some extent, restaurants. In bars, it’ll be even less so.” And the timing of that corresponded with the rise in Delta cases. So as you can see, some skepticism around whether now Jackson Hole would be a venue for a taper announcement.

But what if Powell were to signal a taper? What would it actually be? It would likely be around bond purchases first, not anything having to do with interest rates, but there are some on the Fed that think that Delta or not, that’s exactly what we should be doing. Fed Dallas President Robert Kaplan said that he thinks the Fed should announce a taper of bond buying in September with implementation in October. St. Louis’s James Bullard said that we should start the taper in the Fall and end in Q1 of 2022. Kansas City’s Esther George just said “start it this year.” What’s more, Bullard argued that the economy can handle it, “Some on Wall Street seem to think the numbers are rolling over on Delta. I don’t really know if we can say that yet, but it will peak at some point. The main message here is the economy has learned to adapt to the pandemic.” He also pointed to what he called an incipient housing bubble as a concern: “There is some worry that we are doing more damage than helping with the asset purchases because there’s an incipient housing bubble in the U.S. You’re pricing low income people out of the market. I’m not sure that is what we want to do. We got into a lot of trouble in the mid 2000s by being too complacent about housing prices.”

So this was all the speculation, but Powell gave his speech at 10 am today, virtually. And what did he actually say? Well, it was basically exactly what the new consensus thought. Let’s go through some quotes and then what they actually mean: “At the FOMC’s recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year. The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant, we will be carefully assessing incoming data and the evolving risks.” So what does this actually mean? We were going to indicate that we were going to start to taper, but now we’re focused on Delta as a reason that we might need to stay the course or at least be more cautious.

Back to Powell: “If a central bank tightens policy in response to factors that turn out to be temporary, the main policy effects are likely to arrive after the need has passed. The ill-timed policy move unnecessarily slows hiring and other economic activity and pushes inflation lower than desired. Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful. We know that extended periods of unemployment can mean lasting harm to workers and to the productive capacity of the economy.” What does that actually mean? Well, the nonsensical read is that the Fed is really truly obsessed and focused on the questions of the labor market and employment way more than questions of inflation. A cynical read is, “Hey, listen, we learned our lesson from the taper tantrum when you all freaked out before the last time around.”

Back to Powell: “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff for which we have articulated a different and substantially more stringent test. Even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions.” What does it mean? Even tapering won’t really be a hawkish turn, and tapering in the form of reduced bond purchases has no implications for how fast they’ll raise rates.

So, what does this actually mean? Well, we frequently discussed on the show the arguments about inflation or disinflation being the dominant economic modality of our time. The inflation argument rests on the idea that structurally, the debts the U.S. and other governments carry will force them to either default on those debts or inflate them away. The disinflation idea is focused on long term structural forces such as technology, demographics, etc, that drive prices down over time. We spent so much time examining the day-to-day and month-to-month language of Powell, that many haven’t really examined his larger belief set. It seems pretty clear that he is firmly in that structural disinflationist camp. What does that mean? It means in the short term, nothing is changing. The cheap money party continues unabated, at least for now. Moreover, it means that there are multiple reasons both from the focus on unemployment and the long term disinflation belief that seemed to point pretty clearly to this being just business as usual, regardless of the pandemic status. So for those of us buying assets denominated in USD, let the good times roll. Hope you’re headed off to a great weekend. Guys. I appreciate you listening as always, until tomorrow, be safe and take care of each other. Peace!

And finally, one more big one around inflation: “We’ve said that we will continue to hold the target range for the Federal Funds Rate at its current level until the economy reaches conditions consistent with maximum employment, and inflation has reached 2% and is on track to moderately exceed 2%. For some time, we have much ground to cover to reach maximum employment and time will tell whether we have reached 2% inflation on a sustainable basis. The unemployment rate has declined to 5.4% a post pandemic low, but it’s still much too high and the reported rate understates the amount of labor market slack. Long-term unemployment remains elevated and the recovery in labor force participation has lagged well behind the rest of the labor market. It’s worth noting that since the 1990s, inflation in many advanced economies has run somewhat below 2%. Even in good times, the pattern of low inflation likely reflects sustained disinflationary forces, including technology, globalization, and perhaps demographic factors, as well as a stronger and more successful commitment by central banks to maintain price stability. In the United States, unemployment ran below 4% for about two years before the pandemic, while inflation ran at or below 2%. Wages did move up across the spectrum, a welcomed development, but not enough to lift price inflation consistently to 2%. While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or abated, it seems more likely that they will continue to weigh on inflation as the pandemic passes into history.”

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