“Spur inflation back to a healthy level”
The Kansas City Fed’s Jackson Hole symposium has a prime place in the world of central banking, with past symposiums providing comments from Bernanke in 2010 that “policy options are available to provide additional stimulus”, and one of our favorite papers discussing why “Housing is the Business Cycle”.
This year, there’s much excitement, with “Powell set to deliver ‘profoundly consequential’ speech”, as CNBC explains. In short, in his speech, “Monetary Policy Framework Review”, Powell is expected to “wrap up” the navel gazing review that the Fed has been conducting “both among central bank officials and with the public, during a series of open events”. While this in itself isn’t worth trumpeting, the review was expected to be wrapped up “in the first half of 2020”, “expectations are pretty high to get something meaningful”, in this case commentators appear to be expecting changes to “average inflation targeting”, i.e. not responding while inflation runs above the 2% target to make up for periods of below-target inflation. The idea of allowing overshoots is nothing new, and has been parroted and studied by the Fed. CNBC points out that “the average consumer might find it absurd to want to raise the cost of living”, but “actions are going to speak louder than words” and allowing “a moderate inflation overshoot” could help “avert ‘Japanification’” and provide credibility: “Central bank credibility is crucial” (See Hugh Hendry’s thoughts on Joe Rogan as Fed Chair).
But before betting it all on red and assuming a “risk-friendly move”, there are some doubts. Peter Boockvar argues that the Fed “should be focusing more on taking steps back… rather than continuing with the pedal to the metal”. The article also asks why it is necessary to continue “making aggressive policy moves”, with the economy “expected to rebound sharply” and light utilization of liquidity and lending programs.
However, beyond the should or shouldn’t of a change in the Fed’s framework, Tim Duy, whose Fed Watch blog we have referenced before, tweets “it doesn’t seem the Fed will deliver all that much”, and worries “that Fed watchers will tend toward overplaying it”. If Duy is right, there’s a chance markets are (for the time being) waiting for Godot in anticipating a “revolutionary moment”, which, given the expectations of market participants, is reminiscent of the Twain saying about what you know for sure that just ain’t so…
