Will Jackson Hole symposium provide answers or more questions?
Despite it being a virtual event this year, observers have high hopes for the Federal Reserve Bank of Kansas City's annual Jackson Hole symposium, thinking the year of Fed Listens events may culminate with an announcement of a new monetary policy framework at the meeting.
If Fed Chair Jerome Powell does unveil the new strategy, Morgan Stanley Research strategists Matthew Hornbach and Andrew Watrous say, it may be with the “hopes of changing how the world sees the prospects for future inflation.”
“Even though it may not be revolutionary, it should represent an important evolution,” they wrote. “We hope Powell describes how the longer-run strategy will incorporate the inflation and maximum employment mandates, and how the strategy will change, if at all, when faced with the effective lower bound.”
Accomplishing the dual mandate of stable prices and maximum employment, they note, has “not come easy,” with inflation being the more vexing of the two.
“Whatever changes Fed makes to its monetary policy strategy, it must convince investors and the public alike that the probability of achieving and sustaining 2% inflation is higher than empirical probabilities the past 20 years suggest," they wrote. "This is no easy task, given the global economy looks most like it did in 2010 than in 1970.”
Steve Skancke, chief economic advisor at Keel Point noted an "increased focus" on the Fed.
The symposium "provides an opportunity to gather views of U.S. and international policy makers and to unveil new thoughts by Federal Reserve leaders,” said Skancke.
But three issues are “generating the most pre-symposium interest,” he said: “The Fed’s review of its policy making process and monetary policy tools in the current economic environment and for the decade ahead, their view on inflation targeting and keeping interest rates low for an extended period of time, reaffirming forward guidance into 2023 and also the Fed launching a digital currency backed by the U.S. dollar to augment its current policy tools and in recognition of the growth of digital currencies and other central banks doing the same, most notably China."
The financial markets' reaction to the July’s FOMC minutes' noting "concern" about the impact of the coronavirus on the economic outlook shows how much Fed actions are a "primary consideration," according to Skancke, "Particularly with the Congress and White House at an impasse on further fiscal stimulus.”.
National activity index
The Federal Reserve Bank of Chicago's National Activity Index fell to 1.18 in July from 5.33 in June, signaling slower, but still better-than-normal growth, the Bank said Monday.
Three of the four components were positive in the month, but all were lower than in June.
The index’s three-month moving average, CFNAI-MA3, gained to positive 3.59 this month from negative 2.78 the previous month.
The diffusion index rose to 0.62 in July from 0.14 in June.
Fifty-six of the 85 components of the index made positive contributions in the month, and 29 were negative. Of the 25 that improved in the month, 9 were still negative. The 60 indicators “deteriorated” in the month, the Fed said.