Will the Fed signal an impending policy change at this year's Jackson Hole Symposium?

Yesterday’s semi-annual Monetary Policy Testimony from Fed Chair Powell did not deliver any real surprises, Powell delivering what was largely a repeat of the script given at the June FOMC meeting. But there was a slight change in nuance, with a nod given to the dangers of keeping interest rates on hold for too long, and with the suggestion that this danger is starting to raise concerns for some Committee members.

In what was an uneventful appearance, Powell’s message repeated what is already a known narrative, namely that the US labour market remains “strong”, that the economy is continuing to grow “at a solid pace” and that recent inflation reports have shown some “further modest progress” in returning CPI back to target. The phrases were the same as those provided at the June FOMC meeting; clearly the Fed remains determined not to signal any potential easing in monetary policy yet.

In terms of the outlook for any potential cut in rates, he noted that “more good data” was still needed before the Committee could be fully confident that inflation was sustainably on a path back to its 2% target. But there was no specifying as to what this “good data” actually consisted of. Neither did he allude to the quantity of “good data” required, or over what time period it would be needed. As such, it is a somewhat vague message. The market already knows the Committee is looking for further good data before cutting rates, otherwise they would have cut already. It is therefore impossible to get any sense of timing from Powell's message on how near or far a cut might be.

However, what was of interest, was the comment he made when he said that an elevated level of inflation was not the only risk the FOMC currently faced, saying that “reducing policy restraint too late or too little could unduly weaken economic activity and employment.” This is new and suggests that the dangers of keeping monetary policy too high for too long is starting to concern the FOMC. It is a clear reference to the Fed’s dual mandate, ie its requirement to ensure full employment as well as a 2% CPI target. Although Powell also warned that cutting rates too soon ran the risk of stalling or reversing the progress made to date in returning CPI back to target, it is a clear message that the Committee is starting to show concerns that keeping rates as high as they are is in danger of jeopardising this full employment target. The inflationary picture seen over Q1 clearly rattled the FOMC, and even though Powell subsequently dismissed the stronger numbers as “bumps in the road”, they were enough to frighten and persuade what was an already very risk averse Fed that monetary policy needed to remain tight. Yesterday’s message suggests the FOMC is now moving beyond this position, and that the desirability of easing is gaining traction.

The July FOMC meeting will almost certainly see interest rates remain unchanged. We then have three more CPI reports and two more employment reports before the next FOMC meeting in September. However, perhaps of more importance is that we have two more CPI reports and one more employment report before the 2024 Jackson Hole Symposium in August. With these three reports largely expected to show inflationary pressures continuing to weaken and the labour market continuing to slow, the Symposium provides an ideal opportunity for Powell to acknowledge the FOMC's concerns and signal to the market that a change in policy is about to be delivered. As such, this year’s Symposium could turn out to be the most important and eventful gathering of recent times.