“The question is: Will we have a policy error? That’s why the market’s teetering on edge around the Jackson Hole statement,” said Joseph Brusuelas, chief economist at RSM US LLP. “What we need to hear from the chairman is where the Fed is on the potential policy pivot.”
Current economic condition
Market volatility has already been significant in the lead-up to the event. In early August, a sharp decline in the S&P 500 Index followed disappointing labor market data, while bond traders began pricing in a more aggressive rate cut than previously expected.
Although inflation has eased from its peak, it remains above the Fed’s 2% target. A key measure of inflation showed signs of cooling in July, offering some reassurance to policymakers. However, Powell and his colleagues are wary of the risks associated with a sluggish labor market, which could lead to a prolonged economic downturn if not managed carefully.
In his speech, Powell is expected to navigate these conflicting pressures delicately. While the rationale for cutting rates may focus on a slowing jobs market, he must also avoid sending overly negative signals about the broader economy.
“A downward adjustment doesn’t mean that anything is wrong,” noted Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, speaking to Bloomberg. “To prevent a negative signal from being sent, the Fed needs to be very clear with its communication.”
Source: mpamag.com