WASHINGTON – US Fed Chair Jerome Powell used the central bank’s annual Wyoming research conference to promise inflation-fighting rigor when it was needed in 2022, then last year he came to the defense of the job market with promises of lower interest rates when the unemployment rate seemed on a steady rise.
In his valedictory speech to the conference before his term ends next May, Powell on Friday faces a choice between the two approaches at a time when incoming information has confounded his data-dependent strategy by pulling in both directions.
His colleagues are split whether higher inflation or higher unemployment is the bigger risk. Both investors and the Trump administration have strong expectations that rates will fall at the Fed’s September meeting regardless.
But whether rates do get cut then may be less important than how Powell frames the next steps in evaluating an economy that by some measures is slowing, but by others remains healthy with signs of rising prices still to come. While Powell has pivoted hard when needed, the current moment may find him still straddling the Fed's twin goals of stable prices and low unemployment.
“The Powell I know wants to be data dependent and not make a decision before he has to,” said former Fed Vice Chair Richard Clarida, now global economic adviser for Pimco. “If they do cut in September there will be a lively communication discussion. What are we communicating? Is this one and wait? The first of five or six? Even if they want to cut, the communication could be a challenge.”
Powell’s speech against the backdrop of the Grand Teton Mountains near Jackson Hole will cap a tumultuous eight years punctuated by a global pandemic that spawned aggressive policy invention, a follow-on outbreak of inflation that prompted record-setting rate hikes, and an incessant stream of personal insults from President Donald Trump.
Powell in his 2022 speech channeled the late Fed chair Paul Volcker in pledging to stamp out inflation whatever the cost to jobs and growth.
He is now being challenged to channel Volcker’s successor, Alan Greenspan, another archetype Powell has referenced in Jackson Hole speeches, to look beyond signs of inflation risk and bring the Fed’s 4.25 percent to 4.5 percent policy rate closer to the 3 percent area seen as “neutral,” no longer meant to restrain the economy and appropriate when policymakers are confident inflation will return to their 2 percent target.
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Looking ahead
Inflation remains about 1 percentage point above target now, with reason to think it is moving higher, but the Trump administration argues the risk of persistent price increases is minimal and will be offset by deregulation and the rising productivity that it could induce.
“They try to be more data-driven, which I think is a mistake”; forcing policymakers to wait for confirmation that elevated inflation will recede, Treasury Secretary Scott Bessent said recently, nodding to Greenspan’s “very forward-thinking” 1990s approach to look past rising prices, downplay calls among his colleagues for rate hikes, and count an expected jump in productivity that did help ease inflation.
Fed Governor Christopher Waller, on Trump’s list of potential Powell successors, has also laid out arguments for looking beyond the inflation risk from higher tariffs. Waller favors immediate rate cuts to guard against what he feels is developing weakness in the job market, in contrast tocolleagues who want more confirmation before acting.
That group has so far included Powell. Early in his tenure he made clear his intent to anchor decisions in data and not be overly influenced by economic models and forecasts, willing to move fast when the data compelled it but cautious both temperamentally and under the framework the Fed has been using.
While helpful in avoiding false starts to policy shifts, the approach is susceptible to falling behind given that Fed actions take time to affect the economy and when revisions to past data upend the incoming signal.
