There seems to be more than the normal high anticipation for Federal Reserve Chairman Jerome Powell’s keynote speech tomorrow morning to open the Federal Reserve Bank of Kansas City’s two day “virtual” version of its annual meeting at Jackson Hole. This year’s topic, appropriately enough, is “Navigating the Decade Ahead: Implications for Monetary Policy.”
A few brief points on our expected takeaways:
** First, while the market has pretty much already priced in the implications of the expected changes to the two year review of the Fed’s policy framework — that the Fed is very unlikely to be raising rates for an awfully long time — we would not discount the significance of the revisions to the “Statement on Longer-Run Goals and Monetary Policy Strategy” that is the centerpiece of the new framework and which Chairman Powell is likely to sketch out in his speech.
** The LRS is considered by the Fed officials to be something of a “constitutional” document that “codifies” their strategic approach to achieving its twin mandates on inflation and employment, and it lays out the policy reaction function under all economic and market conditions, by whoever is Chair, on the Board of Governors, or the Federal Open Market Committee. The new framework, in other words, is a big deal, and that they would like to have this finished with a full Committee consensus before the November elections is not coincidental.
** While we are unsure how detailed Chairman Powell will get in previewing the revamp to the framework and the revisions to the longer run statement, we do expect him to confirm the widely expected revisions to the 2% inflation target, formally in place since 2012, with new language that the central bank will seek an “average” of the 2% target “over time” or some such phrasing that will affirm the Fed is tolerating, if not seeking to engineer, an overshoot of the 2% target to ensure it is truly symmetrical rather than a ceiling.
** Equally important, we believe Chairman Powell will go into some length to note the Fed’s changing definition of its employment mandate, namely in expanding on its definition of “maximum” employment to make it clear the Fed is willing to tolerate a headline employment rate below the estimated longer run unemployment level. Indeed, we would be impressed if the Chairman goes some way to acknowledging monetary policy does have an impact on employment levels, especially in expanding its definition to include participation rates or unemployment levels among minorities and other groups.
** We think Chairman Powell may also make note in his remarks tomorrow of the financial stability issues for monetary policy going forward. The current LRS notes the balance of risks to the economy that includes financial instability, but there is some sense within the Committee a more detailed phrasing may be needed, including whether to cite financial stability risks as a safeguard of some sort relative to the otherwise highly dovish nature of the new reaction function.
** A likely period of very low inflation and low rates with little prospect for rate moves will almost certainly invite a reach for yield or leverage excesses that could pose vulnerabilities to financial market stability. We expect the subject to become a major research agenda once the new consensus framework is affirmed. But we think Chairman Powell may at minimum make note of the issue. There is even a lower probability that he could indicate a hardened language making its way into the longer run statement itself, or perhaps as one of the “outcome-based” safeguard thresholds to a forthcoming change in the rates and balance sheet guidance.
** And on that note, we expect the Chairman will almost certainly note that when rates policy is constrained at the Zero Lower Bound, the Fed still has several instruments in its policy toolkit, foremost being an aggressive lower for longer rates guidance that would be framed by either the favored real economy “outcome-based” thresholds on inflation and employment or a less favored calendar-contingent threshold. The guidance would be reinforced by balance sheet policy, either large scale asset purchases weighted to the longer end of the treasury curve, or yield curve controls, which we doubt the Chairman will take entirely off the table.
** But more to the point, we still think Chairman Powell will not be providing any specificity to the likely changes in the FOMC’s post-meeting statement guidance that many in the market are hoping to see in the Jackson Hole remarks. We doubt Chairman Powell will front run the decision the FOMC will be making about its near policy stance and its guidance or distract from the intended focus of the speech on the broader, strategic framework. The post-meeting guidance is a distinctly separate decision, to be made at the meeting and after the forthcoming forecasting rounds and the staff review of market conditions and expectations.
** For what it may be worth, our sense of the Committee sentiment is that on balance a majority would prefer a “two-step” process delinking the unveiling of the strategic framework from the specific rates and QE guidance that would be driven by the immediate market conditions and economic outlook.
** That said, by the time they sit down for the September 22-23 meeting, the FOMC will need to decide whether they can afford to wait until the December meeting at the earliest (November is presumably off the table coming a day after the presidential elections) to introduce the transition from market function support to true monetary policy to provide needed accommodation to foster the economic recovery, with its changes in the guidance on rates and QE. But in any case, we doubt you will see any hints one way or another tomorrow.
** We also suspect, or hope, that in his speech Chairman Powell will address the Fed’s thinking towards the current 13-3 facilities in conjunction with the Treasury. He hinted in one of the most recent post FOMC meeting pressers that the Fed intends to move the 13-3 lending to Treasury or to another entity under Treasury’s arm. But we will also be interested if he talks at all about the Fed’s credit policies in general and specifically the newer Main Street Lending Facility as a potentially complementary policy tool to the more conventionally understood monetary policy going forward.
** And finally, our sense is that some Committee members still worry prolonged dis-inflationary pressures may be overstated while the scale and stickiness of fiscal policy may be under appreciated, meaning the inflation risk may not be as inertial and persistently low as being assumed. So we suspect that the Chairman may also forewarn that policy flexibility will still be at a premium beyond whatever phrasing the FOMC adopts as the near term post meeting statement guidance.