Federal Reserve Chairman Jerome Powell is set to deliver his annual address at the Jackson Hole retreat, and expectations are high that he will strike a balanced stance on monetary policy. With inflation slowing down and the economy stable, Powell may choose to adopt a more flexible approach instead of guiding the public and financial markets. Joseph LaVorgna, chief economist at SMBC Nikko Securities America, believes Powell will play it safe to avoid being boxed into a corner. This year’s speech is expected to fall somewhere in between the aggressive warnings of higher rates in 2022 and the framework announced in 2020. Despite the anticipation for a cautious Powell, markets were nervous and experienced a sell-off before the speech. Nevertheless, Powell is unlikely to be swayed by short-term market fluctuations and will stay focused on delivering his intended message. The market has finally accepted that the Fed is committed to combating inflation and will only change its stance with convincing evidence. Powell’s challenge will be to strike a balance between assuring the market and avoiding a recession. He will want to be slightly more hawkish than neutral to maintain credibility but will avoid a repeat of last year’s speech. Inflation remains a concern, as there are signs that the slowdown may reverse, including rising energy prices and anticipated jumps in inflation. Consumer debt is also rising, despite real wage increases, presenting a dilemma for Powell. The Fed is currently leaning towards keeping rates elevated, with the possibility of cuts next year. While some believe the Fed has done enough for now, others caution against prematurely declaring victory over inflation. Powell is not expected to provide guidance on the natural level of rates in the longer run but is likely to adopt a cautious tone overall.
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