At the Federal Reserve’s upcoming conference, Chairman Jerome Powell is expected to outline a new set of economic measures. The bank hopes that these new measures will finally spur inflation.
The rest of us don’t understand why the Fed wants to increase the cost of living. Meanwhile. the central bank has spent the better part of the last decade doing everything it can to reach it’s goal. It’s trying to reach its target of 2% inflation. However, they often do so with little success.
The Fed, and many economists, view low inflation as a symptom of an unhealthy or struggling economy. The problem for the Fed right now is that interest rates are already low. Because of this, it can’t use rate cuts to try and boost the economy.
Thus, the Fed needs to accomplish two goals simultaneously. The first goal is to get the economy warmed up to create some inflation. The other is to have a healthy enough economy so that it can start raising rates again.
Powell Expected to Outline Approach to Creating Inflation
Powell will outline the Fed’s new approach to creating inflation. He will do so with large swaths of the economy still mired in the coronavirus pandemic. “Monetary Policy Framework Review” is the title of his speech. It’s the conclusion of a year of open events with both central banks officials and the public on what policy should look like in the future.
It’s expected that the Fed will adopt an “average inflation” approach. This means instead of a constant 2% inflation target, the central bank will use more of a “rolling average” approach. So, if inflation stays below 2% or a long period of time, it will then be allowed to run above it for a long period as well. It will do this so that the “average inflation” is closer to the target.
The change in approach is likely due to the Fed’s inability to consistently get anywhere near it’s stated goal of 2% annual inflation. It’s only managed to breach that level twice in the decade since the Great Recession.
Tom Graff, head of fixed income at Brown Advisory, expects Powell’s speech to be a watershed moment.
“The expectations are pretty high to get something meaningful on Thursday,” said Graff, “This is probably a historic speech.”
Krishna Guha, head of global policy and central bank strategy at Evercore ISI chimed in. “Heading into Jackson Hole we are confident Chair Powell will use his speech Thursday to tee up a profoundly consequential and risk-friendly move to soft inflation averaging at the Fed’s upcoming September meeting,” Guha added. He then said that his team expects the Fed to let inflation run a bit higher in the short term. This, he says, is to avoid “Japanification,” or an extended period of low inflation compounded by low growth.
The challenge for the Fed is convincing the market that it will actually allow inflation to run higher than 2% without interference.
“Central bank credibility is crucial. Currently, they don’t have any credibility that they can or are willing to allow inflation to be higher than 2%, and that’s a problem,” added Graff. “Actions are going to speak louder than words. The market’s going to have to see them not hike interest rates even as unemployment gets much lower before they’ll believe it.”
Powell’s speech is scheduled for Thursday.