Each year, the Kansas City Fed’s Economic Policy Symposium in Jackson Hole, Wyo., presents investors and policymakers with the opportunity to consider the composition and direction of monetary policy. Over the past two decades, that policy has been the primary way to stimulate growth as political gridlock prevented the use, until recently, of the fiscal channel.
Given that the title of the symposium, which will be held virtually on Friday, is “Monetary Policy in an Uneven Economy,” one should expect the seminars to be highly academic and that the main event will be Federal Reserve Chairman Jerome Powell’s presentation on the economic outlook at 10 a.m. Eastern.
In our estimation, too much is being made about the Powell presentation. If one looks at the July minutes of the Federal Open Market Committee, one will find that “no decisions regarding future adjustments to asset purchases were made at the meeting.” That statement implies that Powell is in no hurry to front run the FOMC and announce the timing, magnitude and roadmap of tapering operations that we expect to be announced in November and start in December.
What is more likely is that Powell will emphasize the risk to the outlook linked to the delta variant. Other central bank policymakers, including Dallas Fed President Robert Kaplan, who has notably changed his outlook, have made that point in recent days to make sure that a policy bridge is built in case tapering operations are delayed until next year.
We expect that Federal Reserve Chairman Jerome Powell will emphasize the risk that the delta variant is posing to the economy.
Should that be the major focus of market participants following Powell’s opening address, we would anticipate a general risk-on move that would send equities higher and yields lower following the speech.
We expect that Powell will use the question-and-answer session afterward to remind market participants, policymakers and the press that tapering is not tightening, and to offer a reminder of how asset purchases affect financial conditions and support the economy.
While Powell used last year’s symposium to discuss the Fed’s shift in policy toward flexible average inflation targeting, this year’s meeting will not feature any such major announcements.
In many ways, Jackson Hole is returning to its wonky academic and policy origins. It has been many years since the former Federal Reserve Chairmen Alan Greenspan and Ben Bernanke regularly used Jackson Hole as a forum to make major policy pronouncements and move global financial markets.
The academic and policy focus will then turn to how monetary policy can address the risk to financial stability around climate shocks and the greening of finance.
The Fed knows that it will have to lay out the logic of how monetary policy and financial supervision will be formulated in light of the long-term risks to the economy linked to climate change. It is not exactly clear how asset purchases and short-term interest rate policy can do much on that account. But it is up to the Fed to begin making those critical policy distinctions.
Perhaps a more prominent subject, given the Fed’s shift to inflation targeting, will be how monetary policy can be used to address economic inequality. It is an open secret among Fed watchers that central bank policymakers are closely watching the unemployment rate among Black people when making judgment calls on what constitutes full employment.
That is just a starting point for a much broader and deeper discussion around monetary policy and economic inequality that should and will happen at Jackson Hole. For the rest, the Kansas City Fed should start posting the academic papers that underscore the seminar at 1 p.m. Eastern on Friday. Happy readings!
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