DOHA: Every summer, the US Federal Reserve (Fed) hosts its coveted economic policy symposium in Jackson Hole, Wyoming. One of the world’s longest-running central banking conferences, the event brings together top economists, bankers, market participants, academics and policymakers to discuss long-term macro issues.
The Jackson Hole Symposium has always been a high profile on the economic agenda of investors and policy makers, but this year the significance of the event was paramount. For the first time in decades, Jackson Hole occurred during a historic policy normalization process that saw inflation well above target.
Importantly, however, the symposium followed a period of speculation about the possibility of a short-term “policy shift” by the Fed. After months of aggressive monetary tightening with rate hikes of 75 basis points (bps) each, investors expected policy makers to be less aggressive after the summer. Inflation in the US is likely to peak in June, he said, and a “peak of inflation” will lead to a “peak of tightening”. In fact, the market has started pricing in a significant rate cut for him in the second half of 2023.
Despite these hopes for the Fed’s moderates, the tone of Jackson Hole policymakers is decidedly ‘hawkish’ in favor of more rate hikes and withdrawal of liquidity. It was biased toward a more aggressive tightening rather than a “dovish” policy turn to slow down. According to Federal Reserve Chairman Jerome Powell, inflation progress is “far from what the committee needs to see before it is confident inflation is declining” and “restores price stability.” It is likely that a restrictive policy stance will need to be maintained for some time,” Powell said, adding that future decisions on rate hikes will depend on data, with a 75-basis-point He stressed that an unusual rate hike “may be appropriate”.
In QNB’s view, we expect the Fed to lean ‘hawkish’, raising rates by 75 bps in September and 50 bps in November and December, with a final 25 bps hike in early 2023. . percent. There are three main reasons for supporting the QNB’s view on the policy rate.
First, even if US inflation were to drop significantly, it would still be well above the 2% target. In the past, every time U.S. inflation exceeded his 5%, inflation problems would not abate until the policy rate was raised aggressively to a level at least as high as peak inflation. I don’t think the policy rate will exceed his 9.1% “peak inflation” this June, but his 3.8% final rate, which the market is currently pricing in, looks overly optimistic.
Second, despite the recent slowdown, the US economy remains strong, allowing for more aggressive monetary policy tightening. US consumers are particularly healthy, with strong household balance sheets and high levels of available cash ($15.8 trillion). This supports household spending on services, high levels of private domestic investment and a tight labor market. This situation could make the Fed even more cautious about finally pausing rate hikes.
Third, the current balance of institutional incentives favors a more aggressive Fed, even if higher interest rates could lead to a more severe economic slowdown and financial turmoil.
The Fed’s credibility suffered because it failed to recognize the scale of the existing inflation shock early last year. So the Fed is still trying to catch up with inflation and regain its price stability status. In other words, the current policy turnaround hurdles are much higher than in any monetary policy cycle in the last 40 years. The Fed is unlikely to pause before inflation drops significantly for some time.
All in all, Fed officials took to the Jackson Hole stage to reset market expectations about rate hikes. With U.S. economic fundamentals remaining relatively strong while inflation remains well above target for some time, the Fed will be “hawkish” in the short term as it fights to restore confidence. It may continue to tilt. .