Fed chairman has the chance to keep economic expectations in check

Superficially, the economic background of Jay Powell's first Jackson Hole address as President of the Federal Reserve could hardly be better.

The American consumer is on the feet again, economic growth is on an annual basis with more than 4 percent, unemployment is hovering around the lowest point in 50 years and fiscal policy will give a further boost in the second half of the year.

Recent Jackson Hole meetings organized by the Kansas City Fed have been flooded with talk about pedestrian economic expansion, persistent sub-par inflation and the limits of the growth-boosting powers of the central banks. This time in Wyoming, the debate is likely to focus on the steps Mr Powell has to take to prevent excessive exuberance taking root.

The Fed chairman has inherited a good-telegraphic and predictable strategy from Janet Yellen to gradually curb the stimulus. But as the year progresses and we move into 2019, Mr. Powell will have to make a number of major calls himself, working out plans for the next phase in the Fed's exit from monetary policy after the crisis.

One of the most important questions is: where is the so-called neutral level of interest rates that does not suppress or stimulate growth; rates must be reduced to a restrictive area; how should the Fed deal with the threat of financial excesses; and when should the central bank stop reducing its balance of billions of dollars?

Mr. Powell has to navigate in an increasingly quiet political scene, with a president who is more than willing to publicly criticize his own nominee to raise interest rates as the midterm elections approach.

Tim Duy, a professor at the University of Oregon, said the Fed is at a dangerous point. At similar stages of the economic cycle in the past, the US central bank had ultimately sharpened monetary policy, he argued, because it underestimated the delayed effects of previous interest rate hikes. The flattening of the yield curve, which some consider as a possible harbinger of slowing growth, may produce warning signs, he added.

Other economists have argued that the biggest mistake of the Fed in the past was to have too broad a policy and let lending get out of hand.

"We are on our way to another point in the cycle where you are closer to neutral and the Fed has to make harder decisions," said Duy.

The agenda set by the Kansas City Fed for the meetings, which start on Friday and end on Saturday, is not focused on the intricacies of monetary policy in the short term. The organizers want to explore broader questions, including the increased market power of large companies, the migration from retail to online and the interaction between financial stability and bank competition.

But central bankers will have to deal with a series of questions about the Fed's plans – including their likely consequences abroad. Emerging markets such as Turkey and Argentina seem particularly vulnerable to rising US interest rates and the stronger dollar.

Nevertheless, analysts expect that Mr. Powell and his colleagues will continue to tighten policy as long as there are no adverse consequences for the US.

Krishna Guha, vice chairman of investment bank Evercore ISI, said in a letter that he expected them to "show attention to international developments" but also "emphasize the need". . . to balance the international downside risks with a strong economic momentum in the US and medium term domestic overheating risk.

The US is also faced with domestic threats – including the possibility of damaging the business sentiment of President Donald Trump's trade disputes. As things stand, however, the economy is, according to the Atlanta Fed, on schedule to grow with an annual percentage of 4.3 percent in the third quarter. Research by Goldman Sachs suggests that fiscal support for growth in the second half may be greater than previously expected.

Consumers have driven the expansion and recent revisions of official data indicate that they have even more room to ease spending. The personal savings percentage in the first quarter was adjusted upwards to 7.2 percent of a previously reported 3.3 percent, indicating that households are financially less strained than economists had thought.

With just 3.9 percent unemployment and the Fed's favorite benchmark for core inflation of 1.9 percent, analysts have been discussing to what extent inflation can exceed the 2 percent target of the Fed.

The cautiousness of subargagolones weighs with caution and the long report from the Fed on the endorsement of the inflation forecast. Nonetheless, Charles Evans of the Chicago Fed, a policy maker normally known as a dove, added his vote this month to those that suggest that the Fed's key rate may have to be pushed above neutral levels.

Ethan Harris, global economist at Bank of America, Merrill Lynch, said that while global and financial market crashes had caused the Fed to temporarily delay scheduled scheduled rate hikes in 2015 and 2016, the central bank seemed to be paying more attention to today's tight policies. . At the current rate, the Fed has increased the short-term interest rate to the current neutral estimates by mid next year.

The question, he said, was when the Fed no longer presented itself as "the friendly agent on the beat that helps with a flat tire" and instead began with the adoption of the law, setting rates high enough for growth and curb inflation. "They can never accelerate [the pace of increases]but they can go on longer than people expect. "

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