Jerome Powell’s Speech: What You Need to Know

Dear Rich Lifer,

Chairman of the Federal Reserve, Jerome Powell, delivered a highly anticipated address yesterday at the Jackson Hole Economic Symposium.

The Jackson Hole Economic Symposium is sponsored by the Federal Reserve Bank of Kansas City and is held every year since 1981 in Jackson Hole, Wyoming.

This year the convention is being conducted virtually, due to coronavirus, and will stream live to the public for the first time ever.

Every year, the symposium focuses on an important economic issue the world economy is facing.

The proceedings of the symposium are closely followed by market participants, as unexpected remarks emerging from speakers have the potential to affect global stock and currency markets.

Powell began his speech by stating, “We began this public review in early 2019 to assess the monetary policy strategy, tools, and communications that would best foster achievement of our congressionally assigned goals of maximum employment and price stability over the years ahead in service to the American people.”

Today we will break down the rest of Powell’s address and what it means for the economy.

Key Takeaways

The Federal Reserve approved a new strategy that will effectively set aside a practice it has followed for more than three decades to pre-emptively lift interest rates to head off higher inflation.

The biggest changes to previous practice announced was that the central bank will now seek to achieve inflation that averages 2% over time.

Inflation targeting has been the policy of the central bank for years, but this new framework ensures that the inflation target – in this case of 2% – will be accomplished on average over time, as opposed to the previous policy of raising rates whenever inflation rose above 2% at any particular moment.

This means that after periods of low-inflation, such as the dozen years following the Great Recession, the Fed will allow inflation to climb above 2%.

This also signals that the Fed will not be raising interest rates in the near future – even if inflation starts to pick up as America recovers from the pandemic.

It also signals that the Fed will likely be more comfortable keeping its stimulus measures in place for longer, as it waits for the labor market to heat up and the economy to recover.

Mr. Powell said the changes reflected lessons the central bank officials had learned recently about how inflation didn’t rise as anticipated when unemployment fell to historically low levels.

These changes are being heralded as the most ambitious revamp of the Fed policy-setting framework since it was first approved in 2012.

The shifts underscore the Fed’s fears of getting stuck in a cycle of ever-lower inflation, like what Japan has experienced.

“We have seen this adverse dynamic play out in other major economies around the world and have learned that once it sets in, it can be very difficult to overcome,” said Mr. Powell. “We want to do what we can to prevent such a dynamic from happening here.”

Basically, once people expect prices to fall, they avoid making purchases until the anticipated change occurs.

The new strategy by the Fed formalizes steps the central bank has already been taking, especially during the recession, to breathe life into the economy.

Unemployment

The Fed is also making efforts to target the issue of inequality in America.

The gap between the rich and the poor has only widened in recent decades, a problem that also exacerbates financial instability.

The new strategy announced a “broad based and inclusive goal” to achieve maximum employment.

Powell stated, “This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.”

The new strategy highlights a realization among many economists that, because of aging, demographics, and other factors, America can enjoy both low unemployment and muted inflation.

They use the 50-year low in unemployment prior to the pandemic that coincided with low inflation, as an example of this possibility.

Ultimately, Powell states, “a robust job market can be sustained without causing an outbreak of inflation.”

However, the Fed did not put a numerical percentage goal of unemployment because they believe it would be “unwise” due to the fact that maximum employment is “not directly measurable and changes over time.”

Critics

These changes are being watched closely by Wall Street as the central bank’s decisions have a huge impact on the markets.

So far, the Fed’s policies have caused the stock market to skyrocket to record highs. However, there is worry that the Fed may be inflating stock prices to unsustainable levels.

Powell reiterated that the Fed will act swiftly to cool off the economy in the event of runaway inflation stating, “If excessive inflationary pressures were to build or inflation expectations were to ratchet above levels consistent with our goal, we would not hesitate to act.”

Other critics argue that the insistence on generating 2% inflation is misplaced.

Peter Boockvar, chief investment officer at Bleakley Advisory Group, argued in a note to clients that the Fed’s preferred measures of inflation are “flawed” because they are dragged down by healthcare costs that are largely fixed by the government through Medicare and Medicaid. He pointed out that average core consumer prices have been exactly 2% since 2000.

His note went on to say: “Letting inflation run above 2% for a period of time hurts the … least-able to afford it. In other words, LOWER real wages is a growth depressant.”

When prices on commodities from food to gasoline lowered this past spring, Americans certainly didn’t complain. However, if, or when, prices rise it will be hardest on those out of work or dealing with wage cuts.

The Fed has acknowledged these criticisms and responded by stating,

We are certainly mindful that higher prices for essential items, such as food, gasoline, and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes … however, inflation that is persistently too low can pose serious risks to the economy.

How will the economy respond to these shifts? Time will tell.

To A Richer Life,

The Rich Life Roadmap Team

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