Jackson Hole meetings are significant annual events for Wall Street. That's where the chief of the world's most powerful central bank gets the opportunity to talk about the macroeconomic environment at home and abroad and announce significant policy shifts that can make or break financial markets.
While the Fed has yet to release this year's agenda, it isn't too hard to guess some of the areas Fed Chairman Jerome H. Powell will address in his speech.
Delta and the "Third Mandate" Could Put Off Tapering for a Long Time
One of these areas is the spread of the COVID-19 Delta variant, which sets the pace of economic recovery and inflationary pressures, therefore, for monetary policy. That was stated clearly in the July 27-28 minutes of the FOMC meeting released last week. "Members stated that the path of the economy would depend significantly on the course of the virus," the minutes stated.
Another area the Fed chief is expected to talk about is its first mandate assigned by U.S. Congress: price stability. While the Fed chair is expected to recognize that inflation is running well above the Fed's target of 2 percent, he will likely re-iterate the view that the recent surge in commodity prices is temporary due to "bottlenecks." These are structural impediments in the commodity markets that prevent the market's supply side from keeping up with the demand side.
That's a position the Fed chair has taken in several FOMC meetings, where he made the distinction between transitory inflation and permanent inflation. It looks like he may have been right; the price of some hot commodities like lumber, copper, and iron ore have been coming down to earth in recent weeks.
A third area is the employment situation, the Fed's second mandate assigned by U.S. Congress. Here, the Fed chief will probably acknowledge that things are moving in the right direction. As people return to work, the American economy has been adding close to 1 million jobs per month, and the unemployment rate has dropped to below 6 percent.
At the same time, he will likely acknowledge that the U.S. economy has a long way to go before it creates enough jobs to match pre-pandemic levels of employment, and a much longer way before reaching the Fed's elusive goal of maximum, or full, employment.
There's a fourth area as well: the growing income and wealth inequalities and the persistently high levels of homelessness and chronic joblessness for specific groups and certain areas. That's a sort of "third mandate," a mandate that the U.S. Congress hasn't formally assigned, but the Fed Chair has added to the central bank's agenda. Here, the Fed chief is likely to re-iterate a position he has stated in front of the U.S. Congress - that America has a long way to go before addressing these issues.
What would it take to make a dent in these problems? Many things, including easy money to foster economic growth that will expand opportunities for all Americans, including those groups that have remained jobless for a long time.
In short, inflation is a short-term problem. As income and wealth inequalities persist, the U.S. economy is below the pre-pandemic employment levels, and far below its maximum, or full, employment level.
What do all of the above mean for tapering? It can be put off for a long time, or at least until after February, when we'll know who the next Fed chief will be. Meanwhile, risk will remain on Wall Street.
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