With US inflation at a 40-year high, economists say there is no doubt about the US Federal Reserve’s course: Interest rates will continue to rise.
With the majestic Grand Tetons as a backdrop, Fed Chair Jerome Powell is expected to send another clear message that the fight against inflation is not over at Friday’s annual central bankers meeting in Jackson Hole, Wyoming.
Modest signs of a slowdown in the world’s largest economy and easing price pressures fueled hopes in financial markets that the central bank could ease its aggressive rate hikes and perhaps even start reversing course next year.
But former Bank of England board member Adam Posen called the view “nonsense”.
“I think there is wishful thinking on the part of the markets,” said Posen, who directs the Peterson Institute for International Economics in Washington.
“There is no debate at the moment,” he told reporters. “You have no choice but to hike.”
Until and unless there is a recession that also pushes down inflation expectations, “nothing else matters” than lowering prices.
A number of Fed officials, even those like Posen, who are considered “doves” on inflation, have repeated the same message.
Kansas City Fed Chair Esther George, host of the Jackson Hole conference, did so Thursday, telling Fox Business Network that rates are likely to rise through the end of the year until “inflation starts to slow significantly.”
Posen said he expects the reference rate to hit four percent by February and is “ready to go further if necessary, with the chances of a reversal in 2023 being “very, very slim”.
– New price data –
Economist Tim Duy of SGH Macro Advisors agreed, saying Powell will “move the story forward… they will do what they need to get inflation under control.”
“It means rates will be pushed into hawkish territory,” he told AFP.
But he said the Fed chair must be “modest” about forecasting the path of the economy or inflation, after telling the conference last year that price spikes would be temporary.
Powell’s speech last year “didn’t age well, to say the least,” Duy said.
Supply chain problems have continued, exacerbated by a series of Covid lockdowns in China and coupled with Russia’s war in Ukraine, have pushed up prices around the world.
Fighting blistering US inflation, which topped 9 percent in June, the Fed hiked rates four times, including massive three-quarter-point hikes in June and July — steep moves not heard since the early 1980s the current level of a range of 2.25 to 2.5 percent.
However, recent data has shown signs of a slowdown in price increases.
Before his speech, Powell will take a look at the latest report on the Fed’s preferred measure of inflation, the Personal Consumption Expenditure Index.
This is expected to show a dramatic slowdown from June’s 1.0 percent rise, although central bankers may not find much consolation as it likely reflects the recent sharp drop in global oil prices.
Avoiding a recession while interest rates rise remains a difficult task for central bankers everywhere.
“The post-pandemic economy will be more constrained around the world than it has been in the last 25 years,” Duy warned.
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