Fed watchers and Wall Street analysts anxiously waited to hear Jerome Powell’s speech at this year’s Jackson Hole Conference on Friday (8/26). As expected, he chose his words carefully, as his use of the word “transitory” in last year’s speech to describe the inflation we were experiencing at the time came back to haunt him.  But the market response to the speech was a bit of a surprise.

What Happens at Jackson Hole?

Economists and policy makers from central banks and academic institutions around the world gather annually for an Economic Policy Symposium to discuss pressing economic issues, hosted by the Federal Reserve Bank of Kansas City. Also in attendance are financial and economic journalists. It grew from its humble beginnings in 1978 with a focus on agriculture to what it is today. The story behind the move to Jackson Hole (and a broader topic and audience) in 1982 was to attract the attendance of the Fed Chair, Paul Volcker, who happened to be a great fan of fly-fishing. For more on the symposium in general, you can read this explanation from the Kansas City Fed website, and this timeline of its history.

Kicking off the first day of presentations is the Chairman of the Fed, and there is usually much speculation about what the Chairman will say. The speech gets over-analyzed by pundits, who seemingly debate the meaning of every line! What follows his speech is a series of presentations and panel discussions centered on the topic for the Symposium. The focus of this year’s symposium is “Reassessing Constraints on the Economy and Policy.” Every so often, a presentation will introduce a novel or controversial concept that will also get much attention.

The Much Anticipated Speech

The following comment from Powell’s 2021 almost 20-minute speech came to haunt him as the year progressed:

“And from long experience, we expect the inflation effects of these increases to be transitory.”

This year’s speech, in comparison, was short and succint—about nine minutes. Here are the points Powell made:

• The Fed’s mission is to bring inflation back down to the 2% goal.
• "Without price stability, the economy does not work for anyone."
• Inflation is most painful for those who can least afford it.
• It will take time to bring supply and demand into better balance.
• Slower growth and weakening labor market are the “unfortunate costs of reducing inflation. “
• Whatever pain is felt as a result will be less than if inflation is not brought down.
• Underlying economy still strong.
• The labor market is strong but out of balance (demand>supply).
• Interest rates must be sufficiently restrictive and in place long enough to get inflation back to 2%.
• At some point, the Fed may be able to back off the large rate increases, but one month of positive news in not sufficient to pause.
• The Federal Funds rate is currently projected to stay just under 4% through 2023.

Powell said the Fed is drawing on three lessons from history:

1) Central banks should take responsibility for price stability, even though the Fed’s tools just work primarily the demand side.

2) Public expectations of future inflation influence actual inflation as they are entrenched in wage and price setting. The inflation expectation needs to subside.

3) The hope is that if they take more aggressive steps sooner, it won’t take too long to accomplish. "We will keep at it until we are confident the job is done.”

Commentary

The consensus descriptor used by the media following the speech has been “resolute.” “Hawkish” was also used a lot, especially because Powell did NOT use the term “soft landing” anywhere in his speech. And the line most quoted from the speech was the following:

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.”

In sum, the expectation is that the Fed will bring interest rates up beyond the long-run “neutral” level (reached after the July rate hike) to a sufficiently “restrictive” level and will keep them there until inflation abates. One month of better data is not sufficient to back off of the rate increases, and another 75 basis point increase is not off the table. It was a bit surprising to many that the stock market took a deep dive following the speech. Perhaps Wall Street did not anticipate Powell would be so “resolute” and thought the Fed might slow down their rate increases as prices appear to be peaking. His use of the word “pain” may have been the trigger. (NPR)

Lesson Ideas

1) Students can read the NPR article that is a decent summary of what has been included in this post as background.

2) Have students listen to both the 2021 and 2022 speeches. (If you want to make it entertaining, you could listen to or review the transcripts and make bingo cards by pulling out key terms used, or make a list of some key words and have the students track how many times they were used in each speech.)

Here are a few possible discussion questions:

1. What were the key messages from each? Were any messages from last year repeated this year?
2. How did the economic conditions change between the two speeches?
3. Were these conditions anticipated in 2021?
4. What happened that could not have been anticipated?
5. Do you feel you have a clear understanding of what you expect the Fed will do from Powell’s 2022 speech?

If you only have a short period of time to fill, just listen to the most recent speech and focus on the relevant questions for discussion.

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.