One Year Later, Powell Faces a Changed Economy and Market
When Jerome H. Powell spoke at the Federal Reserve Bank of Kansas City’s annual conference in Jackson Hole, Wyo., last year, inflation had recently topped 9 percent and the Fed was raising rates at a breakneck pace to wrestle down price increases. Mr. Powell used the platform to offer a stern warning that central bankers would keep at it until the job was done.
A year later the picture is very different. Higher rates have cooled the housing market and, together with healing supply chains and cheaper gas prices, lowered inflation notably — to 3.2 percent in July.
Instead of warning that the central bank is prepared to push the economy into a recession if that is necessary to calm rapid inflation, Fed officials today are increasingly suggesting that they might pull off what once seemed unlikely: cooling the economy without tanking it.
As he returns to the conference this year, Mr. Powell, who is set to speak Friday morning, is still expected to emphasize that the Fed has more work to do in bringing inflation the whole way back to normal. But many economists and investors think that he may be able to strike a slightly less aggressive tone than he did last year.
“I expect Jay Powell to avoid anything resembling ‘mission accomplished,’” said Jason Furman, an economist at Harvard University — adding that Mr. Powell could suggest that there is more to do, but would not need to sound so ominous to Wall Street. “Unlike last year, Powell doesn’t need to scare anyone.”
Mr. Powell’s grave language a year ago — he signaled that the Fed expected to inflict economic pain in its quest to cool inflation — was partly a rebuke to investors who, at the time, remained skeptical that the Fed would continue to raise interest rates sharply. His comments sent financial markets reeling as they recalibrated.
But this year, market players have come to understand that the central bank means business. Though they expect the Fed is either done or nearly done raising interest rates, strong economic data has also brought them around to the possibility that the central bank will leave interest rates higher for longer.
That’s particularly evident in the bond market, where over the past month the 10-year Treasury yield rose markedly, touching a high of over 4.3 percent. The 10-year yield underpins borrowing across the economy and the impact of this jump is already evident. This week, mortgage rates rose to their highest level in more than two decades, with new loan applications sliding to their lowest level in almost three decades, according to data from the Mortgage Bankers Association. As it becomes more expensive to borrow to buy a house or expand a business, the drastic change to interest rates over the past year could end up dragging the economy down even as inflation cools.
And though data has largely remained strong so far — with consumer spending and hiring beating expectations — there are always reasons to worry that today’s resilient economy could crack as the Fed’s policy restraint hits with a delay.
Consumers are beginning to run out of savings that they had amassed during the pandemic, and some companies have warned that could hurt profits. On Wednesday, new data pointed to an unexpected slowdown in both manufacturing and services sectors last month.
“It was a bit of a reality check,” said Bill O’Donnell, an interest rate strategist at Citi Group.
Such risks, some economists say, are a reason for the Fed to be cautious. Officials have already raised interest rates to the highest level in 22 years — to a range of 5.25 to 5.5 percent. While they are contemplating another increase before the end of the year, some argue that such a move is unnecessary in an economy with cooling inflation and a lot of policy adjustment already in the pipeline.
But given how resilient the economy has been so far, there is also another big threat facing the Fed. Inflation — which is still very elevated, at 4.7 percent, after stripping out volatile food and fuel prices — could remain high as consumers keep spending and companies find that they can keep charging more.
That is likely to keep Mr. Powell sounding resolute.
Higher Treasury yields could actually help weigh against the risk of lasting inflation by pulling down demand, analysts said.
“Rates are moving in the direction that the Fed needs them to — there were worries a couple of months ago that financial conditions were easing, and that’s flipped into reverse,” said Gennadiy Goldberg, a rates strategist at TD Securities. “Growth needs to slow, and for that, you need tighter financial conditions.”
The move up in market-based rates should make officials confident that their policies are translating into the economy and will continue to slow it, said Michael Feroli, the chief U.S. economist at J.P. Morgan, after months in which commentators wondered why financial conditions were not reacting to Fed moves more sharply.
“If anything, it takes away a conundrum, or a source of concern,” Mr. Feroli said. “I think it’s probably going to be somewhat welcome.”
Because there are still several more key data releases between now and the Fed’s Sept. 20 meeting, Mr. Feroli expected Mr. Powell to avoid sending too clear of a near-term policy signal during his remarks on Friday.
But between how high interest rates have already risen and the various risks that cloud the outlook — a moratorium on student loan payments is ending and growth in China has been disappointingly weak, among other factors — some saw reasons for Mr. Powell to be more subdued in his message to the market this time around.
“This is exactly what the Fed wants,” said Mr. O’Donnell, referring to rising yields and a slowing economy. “Why pour more gasoline on the fire?”
