Fed Chairman Jerome Powell’s message on inflation and interest rates at this year’s Jackson Hole meeting of central bankers had a very different tone than his counterpart in 2021. He then used a series of charts to show why he expected pressure on prices would weaken, and he believed the pandemic-hit economy needed continued support from the central bank. The Fed, led by Powell, is fighting high inflation with the sharpest rate hike in 40 years. A year ago, Powell saw US employers adding 832,000 jobs a month, but the labor market still had some way to go to meet the Fed’s goal of maximum employment. The unemployment rate of 5.4% was “very high” and even so underestimated the sluggishness of the labor market. “We expect job creation to continue vigorously,” he said. As it turns out, over time, US employers have been hiring at a more modest rate than 2021 data indicated, although strong job creation has continued, perhaps more than Powell expected.

His speech at Jackson Hole last year shows that the Fed has underestimated the inflationary momentum that the war in Ukraine has exacerbated.

The unemployment rate is now 3.5%, equal to a 50-year low. However, even this percentage indicates how inelastic the labor market remains. While most Fed officials estimate full employment at about 4.5%, “inside, I feel like the natural rate of unemployment is higher,” Powell said in July. Last year, the Fed chairman saw it: inflation appeared to be limited to “a relatively narrow group of goods and services” affected by the pandemic and the reopening of the economy, but general indicators of price pressure showed that they were subdued. “We will be concerned about signs that inflationary pressures are spreading to the economy more widely,” he said. And as it turned out, they spread. The Dallas Fed’s subdued personal spending inflation rate, a barometer referenced by Jerome Powell last year, was one of several common indicators that rose. And price pressure has spread from items like used cars and home exercise equipment to a wide range of consumer goods and services. Finally, a year ago, the president of the bank noted a modest wage increase that did not lead to inflation. However, fees have skyrocketed.

Source: REUTERS