All eyes on Jackson Hole
This will be Jerome Powell’s sixth speech at the Jackson Hole Economic Symposium, noting that his most recent addresses have varied considerably in length and tone. In 2020, Powell introduced the contested concept of “average inflation targeting,” whereby, after periods in which inflation had been below 2%, the appropriate policy would aim to achieve inflation slightly above 2% for some time. A year later, he noted higher inflation and argued that these higher readings were likely to be temporary. Last year at this time, however, he radically changed his tone, communicating a tough message about the challenges posed by inflation and an absolute determination to bring it down. Such restrictive rhetoric may be repeated to some extent this week, as a more balanced assessment is also not ruled out, highlighting on the one hand the progress the economy has made in achieving a deceleration of inflation, and on the other hand, the risks that could eventually arise as a result of fighting this arduous battle.
Regarding inflation, Powell will have positive news to report over the past year. Inflation currently stands at 3.2% annually (vs. 9% on June 22), although upcoming figures could show a momentary rebound expected in gasoline during August. Food prices are also likely to remain under pressure, in line with international prices. On the upside, there continues to be evidence that rental costs and the new vehicle market continue to decelerate.
On the other hand, a balanced view of the labor market would consider the ongoing gradual normalization, with the unemployment rate at 3.5%, near a 70-year low, while nonfarm payrolls added more than 3.3 million jobs last year. Job offers remain well above pre-pandemic levels with nearly 9.6 million job vacancies. However, vacancies are down from their peak of more than 12 million in March 2022 and the pace of job creation is slowing, with only a 187,000 increase in July nonfarm payrolls. Another crucial point relates to wage increases, which while strong over an annual rate of 4.4% (vs. 4% historically), are arguably not overly robust, reflecting more of a compensation for past inflation rather than the result of an intensely competitive labor market.
Finally, a balanced view would probably consider that the current surge in the economy could be temporary. In this regard, economic performance appears robust, with annualized growth of 2.0% and 2.4% in the 1Q23 and the 2Q23 GDP, respectively, despite a tight financial environment, the culmination of pandemic-related economic supports, and a mini banking crisis earlier in the year. Looking ahead, the economy is anticipated to experience reduced momentum due to higher interest rates, potentially impacting the dynamism of the real estate sector, as well as overall investment and consumption. In summary, since the last Jackson Hole conference, a significant improvement in the U.S. economy has been observed. In this context, Powell must acknowledge that the current resilience may not be assured in the upcoming months. Therefore, an anticipated balanced discourse, considering these factors and emerging data, is crucial.
Annual change (%) in headline inflation components
*In July, inflation stood at 3.2% annually.
Source: JP Morgan