FOX Business’ Edward Lawrence presents highlights from Federal Reserve Chairman Jerome Powell’s remarks at the Jackson Hole Economic Symposium.
Reliability Federal Reserve System New research presented at the Kansas City Fed’s annual research conference in Jackson Hole, Wyoming, says interest rate cuts helped financial markets as the central bank fought inflation for years, but it needed to back up verbal promises to restore price stability with cuts.
Research suggests that if financial markets are more aware that central banks are working to contain inflation, monetary policy may become more effective, allowing markets to shift financial conditions more quickly and lower inflation with a less severe hit to economic growth than would otherwise be the case.
Investors Federal Reserve Chairman Jerome Powell The researchers found that while the Fed and other policymakers were serious about maintaining the central bank’s 2% inflation target, that belief developed over time and only after officials began raising the benchmark federal funds rate in March 2022 and accelerated the increases that summer.
Inflation surged to a 40-year high of 9.1% in June 2022, prompting the Fed to raise the federal funds rate to a 23-year high of 5.25% to 5.50% range. With inflation slowing to 2.9%, the Fed is expected to cut interest rates in September for the first time since the COVID pandemic began in March 2020.
Fed Chairman Powell: ‘Time to cut interest rates’
The researchers concluded that the Fed’s interest rate hikes were necessary to support its claims about fighting inflation. Federal Reserve Chairman Jerome Powell pictured here. (Roberto Schmidt/AFP via Getty Images/Getty Images)
“Forecasters and markets were highly uncertain about the monetary policy rule before the ‘hike’ and learned this from the Fed’s rate hike,” found the study by Michael Bauer of the San Francisco Fed, Carolin Plueger of the University of Chicago and Adi Sundam of Harvard Business School.
“A large rate hike appears to have been necessary to change perceptions…the public did not fully understand the Fed’s strategy and policy rules before the rate hike,” the researchers wrote.
The study serves as a warning against central banks placing too much emphasis on the power of “talk therapy”, or influence. Economic outcomes Just words and promises.
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The market is expecting a rate cut in September. (ANGELA WEISS/AFP via Getty Images/Getty Images)
Federal Reserve officials say the recent inflation cycle has weakened public confidence in policymakers’ commitment to inflation. 2% inflation target That alone would help slow the pace of price increases, shorten the time it takes for tight monetary policy to have an effect, and contain inflation while limiting the damage to the job market and other aspects of the “real” economy.
However, the researchers Powell’s Fed While it eventually gained the public’s trust, it wasn’t taken for granted. The researchers used survey data to quantify how professional forecasters would respond to rising inflation. They found that the Fed’s expected response to inflation was near zero, even as prices began to rise in 2021.
While this could be due to other factors, such as a belief that inflation would moderate naturally, the researchers concluded that it was actually because forecasters were unsure of how the Fed would respond. Perceptions began to change following the Fed’s first rate hike in March 2022, with forecasters eventually beginning to expect the Fed to raise rates in response to rising inflation.
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Fed Chairman Jerome Powell (left), speaking at Jackson Hole, said progress toward returning inflation to 2% means it may be time to ease monetary policy tightening. (Natalie Bering/Bloomberg via Getty Images/Getty Images)
The shift in forecasters’ perceptions coincided with policymakers moving from their initial quarterly percentage point hikes to the first of four 75 basis point hikes in June 2022. Mr. Powell delivered a tough speech to the Monetary Policy Committee that year. Jackson Hole Conference It reaffirmed the Fed’s intention to stick to its inflation target despite the economic pain that higher interest rates could cause.
The researchers concluded that as market awareness of the Fed’s sensitivity to inflation increases, “[I]”Interest rates have become significantly more sensitive to inflation data surprises,” and “the increased awareness of inflation has likely helped the transmission of monetary policy to the real economy and improved the Fed’s conduct of policy.” The trade-off between inflation and unemployment“
“Policy rate actions can contribute to and may even be necessary in some cases, particularly when uncertainty about the monetary policy framework is high,” the researchers concluded, suggesting the Fed’s quarterly economic outlook summary could be revised to make the central bank’s “reaction function” clearer.
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“A timely response of policy rates to inflation is important not only to influence near-term financial conditions but also as a signal that policymakers are serious,” they added.
The Federal Reserve’s Open Market Committee is scheduled to meet next on September 17-18, when policymakers are expected to announce interest rate cuts.
Reuters contributed to this report.
