Key Points:
- Fed chair Jerome Powell’s recent speech at the annual Jackson Hole Economic Symposium emphasized the importance of history in guiding the Fed’s current approach to combating inflation.
- Powell outlined three lessons from financial history that support the Fed’s commitment to delivering low and stable inflation.
- Lesson 1: Central banks can and should take responsibility for delivering low and stable inflation, regardless of potential political pressure.
- Lesson 2: The public’s expectations about future inflation play a crucial role in setting the path of inflation over time.
- Lesson 3: The Fed must stay committed to its goal of reducing inflation until the job is done, even if it means enduring short-term economic pain.
- Investors should take note of the Fed’s resolve and prepare for more aggressive monetary tightening until inflation is brought under control.
“Our monetary policy deliberations and decisions build on what we have learned about inflation dynamics both from the high and volatile inflation of the 1970s and 1980s, and from the low and stable inflation of the past quarter-century. These lessons are guiding us as we use our tools to bring inflation down. . . . We will keep at it until we are confident the job is done.” — Jerome Powell, 26 August 2022
Jackson Hole, a picturesque region in Wyoming, is not only known for its natural beauty but also for the annual Jackson Hole Economic Symposium. It was here that Federal Reserve Chairman Jerome Powell delivered a speech on 26 August 2022, outlining the Fed’s approach to combating inflation and emphasizing the importance of lessons learned from financial history.
The Fed has faced challenges in convincing the markets of its commitment to fighting inflation, particularly given its historically dovish stance. Powell’s speech sought to address this by drawing parallels with historical inflationary events and outlining three key lessons that support the Fed’s current approach.
The first lesson highlighted by Powell is the importance of central banks taking responsibility for delivering low and stable inflation. He drew upon the example of the Great Inflation of the 1970s, which was fueled by a failure on the part of the Fed to counterbalance overly expansionary fiscal policy. Powell made it clear that central banks can and should resist potential political pressure in order to prioritize price stability.
The second lesson emphasized by Powell is the role of public expectations in shaping inflation dynamics over time. He noted that once higher inflation became entrenched in the economy in the late 1960s, it was much more difficult to unwind. This highlights the need to prevent inflation expectations from anchoring at elevated levels in the first place, underscoring the importance of the Fed’s current focus on reducing inflation.
The third lesson outlined by Powell is the importance of staying committed to the task of reducing inflation until it is successfully brought under control. He referenced former Fed Chair Paul Volcker, known for his resolve in tackling the inflation crisis of the late 1970s and early 1980s. Powell made it clear that the Fed will not be deterred by short-term economic pain and is determined to achieve its goal of price stability. This signals to investors that the Fed’s tightening strategy will continue until inflation is subdued.
Investors should take note of Powell’s speech and the Fed’s resolve to combat inflation. More aggressive monetary tightening can be expected in the future as the Fed remains committed to its goal of delivering low and stable inflation. While this may involve short-term economic pain, history has shown that the long-term benefits outweigh the costs.
If you liked this post, don’t forget to subscribe to the Enterprising Investor.
