Fed's 'raise and hold' inflation gamble in spotlight as Jackson Hole
awaits Powell
Send a link to a friend
[August 26, 2022] By
Howard Schneider
JACKSON HOLE, Wyo. (Reuters) - If "raise
and hold" sounds like a poker strategy, that may in fact sum up the
all-in approach to fighting inflation that Federal Reserve Chair Jerome
Powell is expected to lay out in a highly anticipated speech to the
Jackson Hole central banking conference on Friday.
As debate raged in recent weeks about whether the U.S. economy was
bordering on recession and how that might throw the Fed off its march to
higher interest rates, Powell's colleagues leaned hard on the idea that
the U.S. central bank's benchmark overnight interest rate would not just
keep rising but remain at a high level until inflation returned to the
Fed's 2% target.
By the Fed's preferred measure, inflation is currently about triple
that.
"I'm really going to try to be as resolute as possible, once we get to a
level that I think is the appropriate level, to really stay there and to
purposefully analyze and assess how our policies are flowing through the
economy," Atlanta Fed President Raphael Bostic told the Wall Street
Journal this week.
![](http://archives.lincolndailynews.com/2022/Aug/26/images/ads/current/topflight_sda_FAIR_2022.png)
"Some weakening is to be expected" in the economy, he continued, and
"it's going to be really important that we resist the temptation to be
too reactionary, and really make sure that we get inflation well on its
way to 2% before we take any steps to increase accommodation in our
policy stance."
Translation: Don't expect the Fed to rescue the economy or the
unemployed from a modest downturn.
The comments from Bostic and other Fed officials mark a subtle but
important shift in emphasis in how the central bank talks about what it
is doing, one Powell may well emphasize when he takes the podium at a
mountain resort lodge outside Jackson, Wyoming at 10 a.m. EDT (1400
GMT).
In recent weeks, Fed officials have shifted from avoiding the "R" word,
saying their hope was to avoid a recession, to downplaying the
significance of one, particularly in the context of the worst outbreak
of inflation in 40 years. Controlling the growth in price pressures
remains their prime focus.
"I don't see the risk of a sustained or deep recession to be very high,"
Philadelphia Fed President Patrick Harker said in an interview with CNBC
on Thursday.
The language matches expectations coming out of the United Kingdom and
other parts of Europe that central banks may need to continue raising
interest rates even in the face of a downturn, rather than provide help
in the form of lower borrowing costs that would boost the economy and
employment.
As much as central bankers have tried to avoid a tradeoff between
inflation and jobs, a sacrifice they feel they wrongly made in recent
low-inflation years out of a misplaced fear of rising prices, they
acknowledge they may have no choice in the current environment.
The pain of a modest recession would be severe for those who lose their
jobs. The costs of runaway inflation, in the Fed's view, would be much
higher and come with even worse risks for the future.
RETURN TO 'CONVENTIONAL' POLICY?
The task now is to sell that view to the public.
[to top of second column] |
![](../images/082622PIX/busine33.jpg)
Federal Reserve Board Chair Jerome
Powell leaves after a news conference following a two-day meeting of
the Federal Open Market Committee (FOMC) in Washington, U.S., July
27, 2022. REUTERS/Elizabeth Frantz
![](http://archives.lincolndailynews.com/2022/Aug/26/images/ads/current/heritagepackaging_sda_FAIR_2022.png)
"The labor market is very tight ... I suspect to get some loosening in that
labor market you will see higher unemployment" as the Fed cools the economy,
Kansas City Fed President Esther George told CNBC on Thursday.
The Fed's target lending rate, currently set in a range of between 2.25% and
2.50%, may need to rise above 4.00%, George said, and "we will have to hold" for
some time as inflation falls.
There is no guarantee how long that may take or what cost may be required in
terms of lost jobs and output.
But it would be an epochal moment for the Fed. The U.S. federal funds rate was
last above 2.50% in 2008, when the central bank was slashing it in response to
the fast-accelerating global financial crisis. Rates have not been held steady
at a level that high since 2006-2007, when a credit-fueled housing bubble began
to collapse.
The outcome back then was bad: A long and scarring recession, fueled by a
banking system collapse, and with a painfully slow recovery in its wake.
The hope this time is that if a recession happens any time soon it will be
shallow, held in check by the fact that the financial system is better buffered
and not as prone to the problems that can turn a modest dip into something
worse. Corporations and households, meanwhile, are on the whole less
debt-burdened.
If inflation can be managed without a deep collapse, it could even signal a
return to a simpler style of central banking where the peaks and valleys of the
business cycle are managed with changes to the federal funds rate alone.
With the onset of the 2007-2009 recession, the Fed cut interest rates to near
zero for the first time. As it became apparent the economy needed more support,
the central bank rolled out a new bond-buying program and other initiatives,
efforts that were replicated and expanded to fight the recession triggered by
the pandemic in 2020.
![](http://archives.lincolndailynews.com/2022/Aug/26/images/ads/current/remington_sda_FAIR_2022.png)
The Fed has spent much of the last 15 years, in fact, preoccupied with how to
manage policy at the "zero lower bound," justifying expansive "quantitative
easing" asset-purchase programs to politicians, researching their effectiveness,
and figuring out how to exit them.
Much will depend on how steadily inflation falls and how fast unemployment
rises.
But if the current approach succeeds, the Fed may be about to turn the page on
the era of "unconventional" monetary policy and return to something more akin to
the approach seen in the 1990s and early 2000s.
"They will have reset the monetary policy table back to an era where risks are
two-sided on both output and inflation ... and that means you are more
comfortable with conventional policy," said Vincent Reinhart, a former Fed
staffer who is now the chief economist at Dreyfus and Mellon. "It'd be a very
big win."
(Reporting by Howard Schneider; Editing by Paul Simao)
[© 2022 Thomson Reuters. All rights
reserved.]This material may not be published,
broadcast, rewritten or redistributed.
Thompson Reuters is solely responsible for this content. |