Powell Economists on Fed Chair Powell's Jackson Hole speech

Aug 26 – US Federal Reserve Chairman Jerome Powell has set financial markets in the mood for a long battle against rampant inflation. Restoring price stability will require tightening monetary policy for “some time,” he told the Jackson Hole, Wyoming, central bank symposium on Friday. To do this, the tools would have to be used “powerfully”. The statements are seen as a clear signal that the Federal Reserve (Fed) will adamantly continue to hike interest rates and that easing is out of the question for the time being. Economists said in the first comments:

CHRISTOPH BALZ, COMMERZBANK:

“We continue to expect the Fed to raise interest rates from the current 2.50 percent to 4 percent this year. Powell’s remarks also suggest a “frontloading” of rate hikes. However, the sharp tightening of monetary policy is likely to trigger a recession next year. Already, according to the Fed’s Senior Loan Officer Opinion Survey, it is clear that banks have significantly tightened credit conditions. In the past, the data has been around since 1990, this was a clear signal of a recession. A recession could only be avoided if the Fed eased monetary policy again in good time by cutting interest rates or a new QE program, or at least stopped interest rate hikes after just one step, as in 2016.

However, the Fed does not have such options this time due to high inflation. However, we think it is likely that by mid-next year, when the economy has slipped into recession and inflation is starting to come down again, the climate will change and calls for rate cuts will emerge. Then the Fed should shift its focus and reverse some of the rate hikes.”

BASTIAN HEPPERLE, HAUCK AUHAUSER LAMP PRIVATE BANK:

“The Fed remains more concerned about a consolidation of exceptionally high inflation than it is about a recession. Additional interest rate hikes are considered necessary to achieve the price stability goal again. A restrictive monetary policy may therefore be necessary for some time. The Fed does not commit itself to the speed and extent of future rate hikes, these depend on the economic data. So all in all nothing new. The Fed will keep as much leeway as possible. The decisive factor for today is that Powell has not clearly rejected the interest rate cut expectations in the financial markets for 2023.”

ELMAR VÖLKER, LBBW:

“How far do key interest rates in the US have to rise to bring the exorbitantly high inflation under control? Fed Chairman Powell did not give a clear answer to this question in Jackson Hole today. However, there is no immediate end to the tightening of monetary policy in sight. First, the central bankers need to be reasonably sure that inflation is on the right track, ie back down. And a first indication of improvement, as last seen in July, is by no means sufficient for this. The Fed is consciously accepting a further weakening of the US economy – as a lesser evil in relation to the alternative of persistently high inflation. Where the pain threshold lies with a view to a possible recession is likely to be one of the crucial questions in the coming months.”