All eyes were on Jackson Hole this morning where Federal Reserve Chairman Jerome Powell was scheduled to make a few remarks about the Fed’s outlook on monetary policy. Powell did not disappoint. He was much more hawkish than most were expecting which caused an almost immediate impact on the street. Powell not only confirmed that tightening would continue but he invoked a hawk’s hawk former Fed chair Paul Volker. Powell noted that they have learned about inflation dynamics both from the high and volatile inflation of the 1970s and 1980s and from the low and stable inflation of the past quarter-century. Here were his three takeaways…
- Lesson One. Central banks “can and should take responsibility for delivering low and stable inflation…the current high inflation in the United States is the product of strong demand and constrained supply, and that the Fed’s tools work principally on aggregate demand. None of this diminishes the Federal Reserve’s responsibility to carry out our assigned task of achieving price stability. There is clearly a job to do in moderating demand to better align with supply. We are committed to doing that job.”
- Lesson Two. The public’s perception of inflation “can play an important role in setting the path of inflation over time…If the public expects that inflation will remain low and stable over time, then, absent major shocks, it likely will. Unfortunately, the same is true of expectations of high and volatile inflation…”
- Lesson Three. “we must keep at it until the job is done…A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.”
What about Volcker? Powell invoked Volker twice. First when discussing expectations about inflation and then again when discussing the importance of holding the line and making sure the job is done before loosening policy…
- “The more inflation rose, the more people came to expect it to remain high, and they built that belief into wage and pricing decisions. As former Chairman Paul Volcker put it at the height of the Great Inflation in 1979, “Inflation feeds in part on itself, so part of the job of returning to a more stable and more productive economy must be to break the grip of inflationary expectations.”
- “The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels…”
The Fed has spoken. They are staying the course whether the markets like it or not.