Elliot Clarke, Research Analyst at Westpac, explains that addressing the Jackson Hole Symposium 2018, “Changing Market Structure and Implications for Monetary Policy”, Chair Powell took a step back from current data points to provide a deeper assessment of the way the FOMC craft policy.
Key Quotes
“Of particular significance were the lessons learned from history. The take-home point is simply that one cannot be wedded to hard targets in the midst of uncertainty. And furthermore, that when inflation expectations are anchored, there is scope to be more accommodative.”
“Where policy makers find themselves versus key benchmarks then matters a great deal. Coming out of the GFC, the unemployment rate was a multiple of the neutral rate, so the risk of a demand-led inflation breakout was non-existent. It was therefore appropriate to keep the stance of policy extraordinarily easy for a long period.”
“Since 2015 though, with the unemployment rate having trended down sharply to, then below, the estimated neutral rate, and as wages growth accelerates, this is no longer the case. The FOMC therefore deem it prudent to take the fed funds rate back to its perceived neutral level, while also reducing the scale of the balance sheet.”
“Once near neutral however, referencing the “New Economy” episode, policy makers must again become circumspect when assessing the stance of policy. Following rate hikes at the September and December 2018 meetings, we believe that the Committee will find itself at this crossroad. Two further hikes in March and June 2019 are likely to follow given the economy’s underlying strength and 2019 stimulus, but this will depend on momentum and sentiment being sustained.”
Share
