August 25, 2023—Federal Reserve Chair Jerome Powell delivered a carefully worded speech this morning to the annual economic symposium in Jackson Hole, Wyoming. The Kansas City Federal Reserve hosts the event.
Here are the key takeaways from the highly anticipated speech:
1. 3 Percent Is Not The New 2 Percent
With the annual inflation rate in the United States down to 3.2 percent, some observers have wondered if that lower rate would suffice. Powell made clear it does not. The target is still 2 percent, and the central bank will not end a restrictive financial policy until the rate reaches that.
“It is the Fed’s job to bring inflation down to our 2 percent goal, and we will do so,” Powell said in the address.
2. Price Categories Matter
Powell spent a significant portion of time analyzing the various price categories. He said inflation started from strong demand, constrained supply due to the pandemic then grew worse due to Russia’s invasion of Ukraine. Now, food and energy prices follow global issues while other price categories are more sensitive to the Fed’s policy.
For example, sales of automobiles are affected by the cost of car loans, which has nearly doubled in less than 2 years. Powell said higher interest rates “have weighed on demand,” and as a result the inflation rate for new vehicles is down to 3.5 percent while the cost of used cars and trucks dropped.
Meanwhile, the housing sector is highly sensitive to changes in the Fed’s interest rates. Powell now sees rents slowly declining. However, the housing market itself is showing signs of picking back up after initially slowing or declining. He added that price trends of homes could impact the Fed’s decisions moving forward.
Finally, a CPI price category that includes health care, food services, transportation, and accommodations is not very interest-rate sensitive. Also, global supply issues did not impact the sector much. Inflation in some of those areas is declining.
3. Job Market Likely To Tighten More
Powell said the Fed is closely watching the labor sector. Furthermore, he expects the Fed’s restrictive policy is likely to tighten the labor market even more. If it doesn’t, the central bank might react with additional monetary tightening.
4. Uncertainty Prevails
Powell avoided promising policy moves in either direction. He insisted that uncertainty prevails on what the policy should be, how long it takes for the policy to have an impact and the economic effect. Observers considered the remarks to be “hawkish,” meaning Powell leaned more in the direction of continued tightening rather than potential rate cuts. The Federal Reserve Board next meets September 19 and 20.
5. The Things Unsaid: Fiscal Policy
Powell made no mention of the impact of fiscal policy on the money supply and inflation. Specifically, he did not discuss the U.S. deficit this year of $1.6 trillion so far this year or the national debt of $32.7 trillion. That’s noteworthy because it is almost as if those factors don’t matter, which of course they do.
