Jerome Powell will step into the spotlight this Friday at the Jackson Hole gathering of central bankers under unusually challenging circumstances, delivering what is widely expected to be his final address as Federal Reserve chair.
His best approach would be to focus on broad strategic issues, drawing lessons from his tumultuous tenure and setting the stage for the Fed’s periodic review of its Monetary Policy Framework. However, such an approach would go against his usual preference for a tactical, data-dependent stance that, today, risks worsening the challenges facing both himself and the institution he leads.
These challenges are significant and complex. For four years, inflation has persistently surpassed the Fed’s 2% target, and recent data suggest it might now be rising further. At the same time, growing evidence indicates a weakening labor market, directly undermining the second pillar of the Fed’s dual mandate. Beyond these economic signs, Powell and the Fed face increasing political pressure that risks undermining the vital policy independence of the world’s most powerful central bank. Adding to these issues, his communication style has often been seen as both confused and confusing, which has amplified market volatility rather than contained it.
The recent dual Fed governor dissent — the first in over 30 years — shows Powell now leads a clearly divided policy committee. Additionally, the newly nominated governor, Dr. Stephen Miran, is widely anticipated to be very critical of both the institution’s recent actions and Powell’s leadership. Above all this, intense speculation about his potential successor casts further doubt on his effectiveness during the remaining time as chair.
Divergent market expectations only heighten the sense of instability. Some investors seek clarification on Powell’s interest rate plans for the September FOMC meeting and beyond. Others are eager to gain insights into the functioning of the labor market, the official theme of this Jackson Hole gathering, hoping for more clarity on structural shifts. Another group eagerly awaits the details of the updated Monetary Policy Framework.
None of this indicates an easy path forward. To offer real clarity on interest rates, Powell would need to decisively break away from his repeated full reliance on backward-looking data — an approach increasingly questioned by the very data it claims to follow. Last week’s inflation numbers highlight this ambiguity: Although headline CPI inflation was lower than consensus forecasts, this was offset by significantly higher Producer Price Index (PPI) inflation and the unsettling rise in inflation expectations reported in the University of Michigan’s sentiment survey.
JACKSON HOLE, WYOMING – AUGUST 25: President of the European Central Bank Christine Lagarde, Bank of Japan Gov. Kazuo Ueda (C), and chair of the Federal Reserve Jerome Powell (L) speak during the Jackson Hole Economic Symposium at Jackson Lake Lodge on August 25, 2023 near Jackson Hole, Wyoming. Powell signaled in a speech Friday morning that if necessary, interest rates could be raised again. (Photo by Natalie Behring/Getty Images) ·Natalie Behring via Getty Images
Powell could also find himself in a bind regarding employment. His ongoing focus on the headline unemployment rate, which has stayed stable at just over 4%, increasingly seems to rely too much on a single data point that conflicts with several other signs of a weakening labor market. These signs go beyond the notable surprise of the downward revision to the July jobs report, including companies’ decreased hiring appetite, the difficulty recent graduates face in finding jobs, and opportunities that are concentrated in an unusually small number of industries.
Meanwhile, both the supply and demand sides of the labor market could be experiencing major structural changes, caused by forces that are difficult to understand with traditional economic models. The Trump administration’s crackdown on illegal immigration impacts the number of actual and potential workers. This occurs at a time when there are still significant questions about the long-term effects of artificial intelligence, especially the delicate balance between labor enhancement and displacement.
This forms an uncomfortable backdrop for the unveiling of the new monetary policy framework, which is meant to provide the strategic overlay for the central bank’s pursuit of its dual mandate of low inflation and maximum employment. Its eagerly awaited unveiling follows the widely perceived failure of the previous iteration, which was essentially “dead on arrival.”
Having been formulated in a backward-looking way heavily influenced by concerns about the effective lower bound on interest rates and persistent inflation undershooting, it proved to be poorly prepared for the unprecedented structural changes sweeping the global economy since 2020. Additionally, given the amount and duration of the inflation overshoot, Chair Powell has consistently refused to discuss an issue that some economists believe needs examination: the appropriateness of the current 2% inflation target in today’s structurally changing economy.
All these factors combine to put Powell in a tough spot as he also faces potential legal issues due to budget overruns on the Fed’s building project. Based on recent behavioral patterns, Powell would likely want to maintain maximum policy flexibility. However, this strategy risks increasing political pressure on the Fed’s independence and intensifying divisions within the FOMC. Conversely, signaling a major rate cut now could lead to the bond market steepening the yield curve in response, much like what happened last year.
Amid all this, an already narrowly defined Framework Review is unlikely to gain the strategic attention it desperately needs, leaving more important long-term policy issues unresolved.
Dr. Mohamed A. El-Erian is the chief economic adviser of Allianz and president-elect of Queens’ College Cambridge. The author of two New York Times bestsellers, he is a senior adviser to Gramercy, professor of practice at the Wharton School (University of Pennsylvania), and senior global fellow of the Lauder Institute.
