At the 46th annual Jackson Hole symposium, Fed Chair Jerome Powell delivered a speech titled: Inflation: Progress and the Path Ahead. The speech provided a plethora of reminders that not all is well in the economy. Starting with the name itself, inflation and a path ahead decided by the Federal Reserve, are two things we could all definitely live without.
He even reminded us that:
Since the symposium a year ago, the Committee has raised the policy rate by 300 basis points, including 100 basis points over the past seven months.
This is all part of the Fed’s plan to reduce (price) inflation by increasing interest rates and reducing its balance sheet. However, this process is far from painless, as exemplified in the housing market, as he also pointed out:
Mortgage rates doubled over the course of 2022, causing housing starts and sales to fall and house price growth to plummet.
Despite the ongoing increase in interest rates alongside an ever rising national debt level, the Fed remains steadfast, consistently reinforcing the possibility of further rate hikes ahead.
We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.
Notice how it’s easy to speak about the financial hardships that have passed, but difficult to speak as to the cause of these hardships. Consider Powell’s take on the increase in prices:
The ongoing episode of high inflation initially emerged from a collision between very strong demand and pandemic-constrained supply.
To accept this as true, it would imply a seemingly rare occurrence where high demand collided with low supply. Even if we say the “pandemic” of nearly four years ago caused supply to decrease, the question of increase in demand should also be asked.
Similarly, if we entertain the notion that everyone suddenly wanted to buy more things, then the reason for this universal splurge should be investigated.
And if the cause of price increases is obscure, it’s made worse by a measurement which few would even understand. From Powell:
I will focus on core PCE inflation, which omits the food and energy components.
He noted that Personal Consumption Expenditures (PCE) inflation went down from 7 percent in June 2022 to 3.3 percent as of this July. While the numbers may not resonate with the masses, one should ask why food and energy are excluded from one of the Fed’s favorite inflation measures.
For this, the Bureau of Economic Analysis (BEA) explains:
The core index makes it easier to see the underlying inflation trend by excluding two categories – food and energy – where prices tend to swing up and down more dramatically and more often than other prices. The core PCE price index is closely watched by the Federal Reserve as it conducts monetary policy.
The irony is striking! The Fed wields influence over hundreds of millions of Americans while leaning on a measure that conveniently omits two crucial components of daily existence: food and energy.
Especially for those just learning about how the system works, we find there exists an exclusive group of people who discuss pressing matters like the high cost of living and the burden of mortgage and debt commitments, outlining strategies to address these issues. Yet, their reliance on data is as puzzling as their attempt to identify the root cause of distress in the first place.
In Powell’s own words:
As is often the case, we are navigating by the stars under cloudy skies.
…we can all but wonder what life would be like if we navigated ourselves.
