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The Fed chair warned of pain ahead. Is he ready to change his tune?


JACKSON HOLE, WYO. — When Federal Reserve Chair Jerome H. Powell delivers his biggest speech of the year on Friday, he could strike a noticeably different tone than he did this time last year.

Last August, Powell was unusually direct at the Jackson Hole Economic Symposium, using his brief speech to send a clear message: The Fed would stabilize the economy at any cost. He warned that the “pain” of sharply rising interest rates was coming for households and businesses — an unfortunate but necessary cost to controlling inflation, which had soared to 40-year highs. Economists gave central bankers slim odds of avoiding a recession as they raced to slow the economy. Powell’s remarks sent the financial markets tanking.

What recession? This summer’s economy is defying the odds.

A year later, a surprising story is playing out. After peaking at 9.1 percent last summer, inflation has come down significantly, with the consumer price index rising 3.2 percent in July compared to the previous year. That is still too high for the Fed’s satisfaction. But there has been major progress as the Fed hike rates, supply chains clear their backlogs and the energy shock from Russia’s initial invasion of Ukraine fades.

Progress on inflation stalled in July as prices nudged up

The job market has defied expectations, too. The unemployment rate stood at a hot 3.5 percent in July. Employers are eager to hire, with about 1.6 job openings for each person looking for work. Layoffs have stayed relatively contained to sectors that bulged in the pandemic and then struggled to reset, like tech, advertising and housing.

And crucially, people are still spending, with shoppers doling out for restaurants, vacations, concert tickets and more. Many Americans are better off than before the pandemic, and there are few signs that consumers will suddenly tighten their belts.

Put together, the economic picture looks better than at any time over the past few years, although it is still a mixed bag. Even as inflation eases, prices aren’t expected to return to pre-pandemic levels. And many Americans still feel the sting of high costs for the basics.

Fed raises rates again as it weighs how much further to go

“We are in a strange situation,” said Adam Posen, president of the Peterson Institute for International Economics. “Every measure we have of U.S. economic performance, household balance sheets, household assets, unemployment rate — up and down the line, this is the best we’ve had it in 25 years, at least, and in some measures in decades. We have to recognize that’s true. And that people just don’t see it.”

That is part of the reason Powell may stop short of declaring mission accomplished. Fed officials have long said that they will not let up prematurely, and they could push even harder to snuff the remaining inflation out of the economy. Central bankers left the door open for another possible rate hike at their next policy meeting in September, and Powell’s speech could clarify what he thinks is necessary.

How the Fed’s rate hikes slow the economy — and impact you

For now, the Fed’s benchmark interest rate sits between 5.25 and 5.5 percent, the highest level in 22 years. Another quarter-point hike would mark the 13th rate increase in 18 months.

Susan Collins, president of the Federal Reserve Bank of Boston, noted that individual rate hikes are not the only way the Fed will stay resolute on inflation. Speaking to The Washington Post on Thursday, Collins said the central bank will need to keep rates high for a long period of time, rather than presume the job is done and cut rates too early.

Earlier phases of the Fed’s rate hike campaign were about speed, Collins said. Now, policymakers can take more time to see if their policies are sticking.

“We’re in a place where I think the work that we’ve done positions us to be able to be patient,” Collins said. “Taking longer, more holistic looks matters.”

One reason policymakers are weighing whether to keep going is that rate hikes operate with a lag. Higher borrowing costs are designed to cool demand for all kinds of investments, from mortgage rates to auto loans. But wild swings in the economy have made it difficult to model that timeline with much precision. The risk is that the Fed presses on before it fully understands how its moves affect households, businesses and the financial system.

Plenty is unknown. The topic of the Jackson Hole conference — a “who’s who” gathering of the world’s leading economists and policymakers — focuses on shifts in the global economy. Central bankers are closely watching economic tumult in China with some trepidation of spillover effects.

Meanwhile, some economists are debating whether the Fed should raise its inflation target from 2 percent, a move that, some argue, could protect the economy from future recessions.

More immediately though, the Fed’s top focus is on zapping the remaining sources of inflation. For months, rent has dominated as a key driver of price increases. There are signs that rent is finally cooling from pandemic highs. But a more meaningful drop isn’t expected until more homes come online later this year and next.

Groceries are also up: Meat, fish, eggs and dairy products all got pricier in July following two months of declines. That reality could answer why many Americans feel so bad about the economy or struggle to see progress in their daily lives.

Mary Daly, president of the San Francisco Fed, said there is a kind of exhaustion pulsing through the economy. In conversations across her district — which spans California and eight other Western states — Daly said she routinely hears from people who are financially scraping by. There is anxiety lingering for many households, after dealing with inflation or worrying about whether another recession is around the corner, she told The Post this month.

Daly described one conversation with a worker who said her food bill was still two or three times what it was before the pandemic. But her paycheck was not two or three times what she used to earn.

“That gap feels challenging to people,” Daly said. “There is no doubt things are better. But it is also clear we are not done yet.”

POST AUTHOR: Rachel Siegel

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