Mission Not Accomplished

Fed chairman Jay Powell, his meeting with international colleagues in Jackson Hole behind him, doesn’t have much time to relax, strum the old guitar, play a few Deadhead tapes, and read a few spy novels before Friday’s job report and intensive planning for the announcement of the monetary policy committee’s next move at its September 19-20 meeting.

A Good 16 Months’ Work

The chairman has reason to look back on his work this past 16 months with some satisfaction. He has presided over eleven increases in the Bank’s benchmark interest rate, bringing it from negative territory to a range of 5.25-5.50 per cent, its highest level 22 years. He has begun to bring the Fed’s balance sheet down at the rate of $900 billion per year from the stratospheric levels to which purchases of mortgages and government IOUs – Quantitative Easing in the jargon of the trade – had elevated it. He has brought the rate of increase of the Consumers Price Index down from 9.1 in 2022 to 3.2 per cent this past July. The Fed’s preferred inflation measure stood at 4.1 per cent in June, down from a peak annual increase of 5.42 per cent in February 2022. And he has not thrown the great American economy into a recession, to which experts who believe the Fed rarely moves policy without “breaking something”, would add, “as yet”. David Kelly, JP Morgan Asset Management’s chief strategist, says Powell is entitled to “a bit of a victory lap” for engineering a drop in inflation without inducing a recession.

Powell is having none of the “mission accomplished” talk. He told his global colleagues, “Inflation … remains too high. We … intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective. … Two months of good data are only the beginning. … The rebalancing of the labor market remains incomplete…”.