MNI POLICY: Powell Sees No Elevated Risk Of Inflation Overheat

By Sara Haire

     WASHINGTON (MNI) - Federal Reserve Chair Jay Powell went back in time to

explain what the Fed has learned from previous policy mistakes when he delivered

his speech at the Kansas City Fed Annual Symposium in Jackson Hole, Wyoming on

Friday, reiterating that gradual rate increases are still appropriate and noting

that inflation is not showing clear signs of an acceleration over the 2%

threshold. 

     Here are 5 key takeaways from his speech: 

- Once again Powell reiterated how strong the economy is currently and that

while inflation has moved up near the 2% objective, there "does not seem to be

an elevated risk of overheating." Powell addressed the issue of staying in

goldilocks scenario and trying to find where the mythical neutral rate is so as

to not cripple the economy but also does not let it run too hot. However, Powell

also expounded on the fact that estimates for longer-run levels have evolved

over time and so trying to find the sweet spot is inherently easier said than

done.

- The economy being as strong as it is suggests that the path they are on is

currently the right one and if it continues this way, "further gradual increases

in the target range for the federal funds rate will likely be appropriate." He

explained that inflation has moved up near their 2% objective and they have not

seen any "clear sign of an acceleration above 2%." However, no sign of

overheating or accelerating inflation does not suggest that they will be

altering their policy path any time soon given that the Fed will now be paying

closer attention to all incoming data, including labor market data, in order to

inform their decision instead of being tethered to inflation when setting

policy.

- Federal Reserve Chair Powell gave credence to a recent paper published by the

Fed staff that showed "that no single, simple approach to monetary policy is

likely to be appropriate across a broad range of plausible scenarios." Powell

reiterated that point and explained that in order to make sure monetary policy

is doing what it should do, the Fed does not stick to one set rule to dictate

their movements, especially given the uncertainty over longer-run estimates of

the neutral interest rate and the unemployment rate.

- According to Powell, in navigating appropriate policy, there have been errors

made previously that the Fed now recognizes and is ready to combat if necessary.

One of the mistakes that the FOMC had made previously was that they "had placed

too much emphasis on its imprecise estimates of u* and too little emphasis on

evidence of rising inflation expectations," Powell said. In order to avoid this,

Powell explained that anchoring inflation expectations is one of the "vital

preconditions" for reaching all other monetary policy goals. If inflation

expectations were to become unanchored, Powell said he was "confident that the

FOMC would resolutely "do whatever it takes" should inflation expectations drift

materially up or down or should crisis again threaten." This suggests the Fed

will not cautiously wait and see, but will use the necessary tools to fix the

problem before it becomes a bigger problem.

- In addition to acknowledging that the FOMC is not following a set rule in

terms of policy, Powell wanted to emphasize that the Fed made mistakes

previously in terms of paying too much attention to imprecise data and too

little to other incoming data. He did emphasize that the policy path must take

into account more than just price stability and maximum employment and

effective, stable interest rates. Powell explained that estimates of longer-run

expectations for the unemployment rate and inflation may not be the best

indicators to look at given the high levels of uncertainty. He also explained

that looking outside inflation is going to be key given that in "the past two

recessions, destabilizing excesses appeared mainly in financial markets rather

than in inflation. Thus, risk management suggests looking beyond inflation for

signs of excesses." 

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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