Thread by @RickRieder

In his @federalreserve #JacksonHole speech #ChairPowell stated emphatically that the #FOMC’s “overarching focus right now is to bring inflation back down to our 2 percent goal. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy.”

In other words, we take his statement today to mean that the #Fed won’t be easily swayed into reversing rate #hikes next year, and will stay with the elevated Funds rate for a long time.

The #Fed has clearly been (appropriately) rushing to get to a destination of #inflation-denting restrictive rate (and #liquidity) policy in order to break extremely high levels of inflation, while hopefully not thrusting the economy into a deep #recession.

Many have suggested that the Fed has to move rates much higher (toward, or above, the existing level of inflation) in order to break these higher #inflationary expectations.

Yet, #markets have recognized the #Fed’s vigilance in bringing 5-year and 10-year #InflationBreakevens to 2.80% and 2.60%, respectively, in line with higher than target inflation, but presumably acceptable levels relative to today’s extremely elevated inflation.

This inflation-fighting credibility, alongside of a clearly moderating #economy, suggest that the #Fed may be able to move quickly with another historically high-rate adjustment, so that they can get the Funds rate more firmly in restrictive policy and then can wait and watch.

Monetary #policy works with long and variable lags and thus moving briskly to the mid- to high- 3% range on the #FedFunds rate will allow the Fed to get to its destination and then to relax and watch its policy adjustments work.

Still, while it’s absolutely imperative that the #Fed get the currently high rate of #inflation under control, we’re concerned about the potential for the central bank to overdo #tightening and undo much of the progress that has been made in recovering from the pandemic shock.

In fact, since the Covid crisis began, #wages are higher across the board, and importantly, this has been especially true for lower #income cohorts.

As a result, while the #Fed clearly needs to continue #tightening, policy makers will want to be very careful to not unnecessarily derail some of these longer-term positive trends, while keeping rates elevated for an extended period of time for the economy to structurally adjust.

For the sake of the gains made by many in the post-Covid recovery period, we hope #policymakers keep as close an eye on these factors as they do on the damaging impact of #inflation itself, which as we heard again today is at the forefront of the Chairman’s policy attention.