What’s ahead for Wall Street and Main Street when Federal Reserve officials return to work after a few days in the fresh mountain air of Jackson Hole, Wyoming ?
Economists expect the central bankers will seek to underscore and expand on Fed Chairman Jerome Powell’s message that the “pain” of derailing inflation now is much worse than the “agony” of high inflation in the future if the central bank does not act forcefully.
Powell’s main message in his blunt comments Friday was to disabuse markets of the notion that the Fed will reverse course and cut interest rates next year – a so-called “fed pivot.”
See: Fed’s Powell says bringing down inflation will cause pain to households and businesses in Jackson Hole speech
With this task done, “the Fed now has to underscore interest rates need to get to a higher level,” said Vince Reinhart, chief economist at BNY Mellon Investment Management.
The most likely vehicle for this hawkish policy message may be the Fed’s updated economic forecast, which will be released on Sept. 20 at the same time the next interest-rate decision is announced.
In previous forecasts this year, the Fed has projected a soft or soft-ish landing for the U.S. economy, where the central bank manages to get inflation down without a steep rise in the unemployment rate.
Powell’s remarks about “pain” for households and businesses and “sub-par growth” opens the door for the Fed’s Summary of Economic Projection to be different now, said Diane Swonk, chief economist at KPMG, in an interview on the sidelines of the Fed’s Jackson Hole retreat.
“The SEP will be more realistic .The projections will no longer be a narrow path toward a soft landing,” Swonk said.
For starters, the Fed’s latest forecast, released in June, projects the unemployment rate only rising to 3.9% in 2023 and 4.1% in 2024.
That level will be revised up to at least 4.5%, Swonk said.
See: U.S. adds 528,000 jobs and unemployment falls to pre-pandemic levels
The Fed projected the “terminal rate” of its benchmark interest rate would only rise to 3.8% next year. The terminal rate is the highest rate of a cycle.
Reinhart said it was not clear whether the Fed would lift the terminal rate above 4%, but he said he viewed the rate projections as the “lower bound” of likely outcomes.
Cleveland Fed President Loretta Mester said Friday the Fed needs to lift its benchmark interest rate above the 4% level. Other officials have said they were comfortable with the June projections.
William English, a professor of finance at Yale University and a former top Fed staffer, says the Fed faces two risks.
One the one hand, the U.S. economy may slow more faster than the central bank thinks.
On the other, the risk is that the Fed isn’t doing enough to cool inflation and it stays hot and the public starts to expect higher prices.
The risks of hotter inflation are more likely so the central bank is “leaning a bit toward tighter policy,” English said.
Financial markets will have to adapt to this message but it will also be a tough message for Main Street.
This won’t be easy.
“It is hard to convey to the public that pain today is better than deeper pain,” Swonk said.
Referring to her own recent successful bout with breast cancer, Swonk said that inflation is like a cancer in that it can spread quickly is not addressed.
This is hard to explain to the public that doesn’t want to think about ever getting a diagnosis of cancer, she said.