The stock market momentum seen for much of the year has stalled and one catalyst that could reignite the rally is the news out of the three-day Jackson Hole Symposium that kicks off on Thursday. Noted economist Mohamed El-Erian shared three approaches Federal Reserve Chair Jerome Powell could take when he speaks on Friday.
Recalling Short Speech That Jolted Markets: Given the typically high level of interest in the comments from Powell at the symposium and central bank heads playing it according to circumstances, said El-Erian in a Financial Times op-ed published on Monday.
They signal imminent monetary policy steps, delve into long-term monetary policy issues or limit themselves to a narrow economic question with no immediate policy implications, he added.
Powell takes the podium in a moment of “great economic fluidity with fascinating policy challenges and trade-offs,” the economist said.
In 2022, Powell delivered a “shockingly short” speech that was under nine minutes, El-Erian noted. As he said bringing down inflation would also bring some pain to households and businesses and that “failure to restore price stability would mean far greater pain,” the stock and bond markets nose-dived, the economist said.
“But with robust U.S. economic growth and unemployment hovering merely a hair away from its historic low, what actually transpired was akin to a ‘waiting for Godot’ scenario — a pain expectation repeatedly alluded to but not realized at the aggregate level.”
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Will Powell Sing A Different Tune? The first approach of talking about imminent policy moves is too tempting, said El-Erian. The economist noted that there are several questions swirling around, including whether the Fed is ready to end its rate hikes, the timing of rate cuts, and should inflation misbehave, the "patience the central bank is willing to show to minimize the risk of an economic recession in the ‘last mile' of combating unanticipated high inflation.”
The second option of taking a long-term approach is also on the table, said El-Erian, especially as Powell mischaracterized inflation as transitory and the Fed is also blamed for belated policy response in the current tightening cycle.
The economist also noted ongoing debates over whether the 2% inflation target set three years back is appropriate now.
El-Erian also discussed the possibility of the Fed following in the footsteps of the Bank of England in instituting an external evaluation of its forecasting errors.
Powell could also weigh in on the third strategy of shelving both immediate and long-term policy issues, focusing instead on a specific economic query with few immediate implications, the economist said.
“It may be the most cautious course for someone who has had communications challenges,” he said
“What is less clear, however, is what he will opt for. If I were advising him, I would suggest the third strategy at this economic, political, and institutional juncture,” El-Erian said.
The stock market swooned in August amid fears of further rate hikes materializing in the wake of strong economic data and seasonal weakness. The SPDR S&P 500 ETF Trust SPY, an exchange-traded fund that tracks the S&P 500 Index, is down over 4% in August, although it is up over 15% for the year.
Any hint from Powell that a pause is in the offing could help the return of risk-on mood in the markets.
Photo via Brookings Institution on Flickr
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