If there were any lingering doubts the Federal Reserve intends to boost its benchmark interest rate by another quarter point next month, Chair Jerome Powell settled them last Friday.
Powell, during his speech at the annual gathering in Jackson Hole, Wyoming, hosted by the Federal Reserve Bank of Kansas City, established a clear case that our economy is ready for “normalization.”
He also provided an interesting glimpse into how the Fed makes policy decisions.
In sum, the Fed is cautious – and that reflects a level of uncertainty about outcomes of policy decisions that will create opportunities to profit.
According to Powell, the U.S. economy has strengthened substantially; that’s reflected in the fact that unemployment has declined for almost nine years and is now near a 20-year low. Most people who want a job can find one.
Meanwhile, inflation is close to the Fed’s 2% target after six years of running below that level.
And, because of fiscal stimulus, slowly rising incomes, and high levels of consumer and business confidence, Powell believes current strength will persist.
Powell noted that “navigating by the stars can sound straightforward. Guiding policy by the stars in practice, however, has been quite challenging of late because our best assessments of the location of the stars have been changing significantly.”
That’s a signal Powell also believes traditional methods of determining policy aren’t working today.
A particular problem the Fed is encountering is how to calculate the level of employment where rising wages begin to fuel unconstrained inflation.
The traditional “Phillips Curve” model hasn’t worked of late.
The Fed is on the horns of a dilemma.
Unemployment is far below the longer-term historical rate. So, why isn’t the Fed tightening policy more sharply to stave off an overheating economy and get in front of inflation?
