On the eve of the Federal Reserve’s meeting in Jackson Hole, markets are holding their breath in anticipation: what surprise awaits this time? Yes, Fed Chair Jerome Powell may catch investors off guard. According to Wells Fargo analysts, Jerome Powell is likely to take a very close look—almost under a magnifying glass—at how the US economy and the central bank’s policy have evolved during his tenure. His conclusions will serve as a market catalyst.
Back in 2020, during his address at the annual Jackson Hole symposium, Powell spoke about changes to the policy framework of the Federal Open Market Committee (FOMC). That plan is expected to be completed five years later.
Against this backdrop, Wells Fargo’s experts noted that shortly before the previous review of the FOMC framework, the economic environment was marked by persistently low inflation and excess labor market slack. Now the picture is different: the Federal Reserve is striving to maintain stable inflation and ensure maximum employment.
The adjustments made in 2020, in the midst of the COVID-19 pandemic, reflected the perceived asymmetric risks to the Fed’s dual mandate, the analysts argue.
However, since then, the macroeconomic landscape has shifted dramatically. Following a series of shocks, US inflation rose above 2% in March 2021 and has not returned to its previous range. Meanwhile, unemployment slipped below 4% and is now hovering around 4.2%.
For several years, US monetary policymakers have faced an overheated labor market and inflation above the 2% target. Such entrenched problems cannot be solved overnight, Wells Fargo believes.
In this context, the experts do not expect any breakthrough from the central bank. “Major changes in the regulator’s toolkit are unlikely this year,” the bank emphasized. At the same time, the federal funds rate will remain the key instrument the central bank can use to respond to ongoing trends in employment and inflation.
Moving away from the asymmetric risks associated with low inflation and maximum employment marks an important milestone and a departure from the mindset of the 2008–2020 period. This could lead to a more preemptive tightening of Fed policy when the next inflationary episode arises, Wells Fargo concluded.
