For almost 60 years, the British journalist and New York resident, Alistair Cooke, recorded a weekly, 15-minute radio commentary entitled Letter from America. As a teenager, I would listen to it, late at night, on the BBC World Service. Cooke had a beautiful speaking voice and a remarkable way with words, as he painted landscapes of American culture and portraits of America’s personalities. Letter from America made me feel well-acquainted with this country long before I arrived here. Cooke, of course, had strong opinions based on his own observations. However, he also had a quality of balance—he was not one to be swept up in the latest national obsession but, rather, spoke of his world in a measured way.
The week ahead will see the usual battery of economic indicators with the stock market weighing the strength of economic data against the drag of high interest rates. However, most investor attention will be focused on Chairman Powell’s speech on Friday at the annual Jackson Hole conference—a sort of Letter from Wyoming on how he and the Fed see today’s economic landscape and the road ahead.
This will be Jerome Powell’s sixth Jackson Hole speech, and his previous addresses have varied considerably in length and tone. Most notably, in 2020, Powell introduced the ill-fated concept of “Average Inflation Targeting,” by which, following periods when inflation had been running below 2%, appropriate monetary policy would aim to achieve inflation modestly above 2 percent for some time. A year later, he noted higher inflation but argued that these elevated readings were likely to prove temporary. By this time last year, Chairman Powell had sharply changed his tune, invoking the wisdom of Volker, Greenspan and Bernanke, in a short, hawkish lecture on the evils of inflation and the Fed’s absolute determination to defeat it.
This week may well see some repeat of that hawkish rhetoric. However, we can hope for a more balanced assessment, noting both the progress the economy has seen in achieving lower inflation and the danger, given the lags involved, in fighting the inflation battle too zealously.
Progress On Inflation
On inflation, Chairman Powell will have lot of good news to report over the past year, even though numbers over the next few weeks could show some backsliding.
Next week’s data for July should show a year-over-year increase in the headline consumption deflator of 3.2%, still higher than the Fed’s 2% target but well down from a peak of 7.0% in June 2022. However, recently rising gasoline prices will contribute to higher inflation readings in August, when we expect the headline consumption deflator to post a year-over-year gain of 3.4%. That being said, refiner margins are now very high and global economic growth is moderating, suggesting that energy prices are unlikely to spike higher and could well ease in the months ahead. Food prices are also likely to move sideways based on trends in global food commodity prices. Meanwhile, there is continuing evidence of fading inflation in rents and the new vehicle market. Despite higher inflation in August, we expect year-over-year headline and core consumption deflator inflation to be 2.9% and 3.4%, respectively, by the fourth quarter of this year, well below the Fed’s June projections of 3.2% and 3.9%. By the fourth quarter of 2024, we expect both numbers to be very close to 2%.
A balanced view of the inflation outlook would focus on the clearly receding inflation tide. However, there is a risk that, in keeping with the Fed’s recent hawkish rhetoric, the Chairman Powell expresses undue concern about the consequences of the potential August increase.
The Slow Normalization Of The Labor Market
A balanced view of the labor market would also be one of steady normalization. The unemployment rate, at 3.5%, continues to hover close to a 70-year low, as it has done for more than a year and payroll employment has grown by 2.2% or over 3.3 million jobs in the last year. Job openings remain far above pre-pandemic levels with almost 9.6 million unfilled positions. However, job openings are down from their peak of over 12 million in March of 2022 and the pace of payroll job gains is slowing, with just a 187,000 increase in payrolls in July.
Most importantly, wage gains, while strong at 4.4% year-over-year, are not explosively strong, and may well reflect compensation for past inflation more than the product of an intensively competitive labor market. Provided consumer inflation continues to fade and both businesses and workers continue to worry about potential recession, wage growth should remain relatively stable in the months ahead and, potentially, ease in 2024.
A Temporary Surge In Economic Activity
Finally, a balanced view would probably regard the current surge in real GDP as temporary. The growth numbers do look impressive, with the economy posting a 2.4% annualized gain in real GDP in the second quarter and the Atlanta Fed GDPNow model projecting a 5.8% gain for the third. Our own models are suggesting a less spectacular gain of between 3% and 4%. Still, this shows remarkable momentum, given an economy that is severely constrained with regard to labor supply, the drag from an end to pandemic aid and tightening lending conditions following the banking mini-crisis earlier this year.
That being said, all of these drags are very real and will be augmented by a resumption of student loan repayments this fall. In addition, the recent back up in long-term interest rates, combined with much higher short-term interest rates, will likely depress homebuilding, inventory accumulation and business fixed investment later this year and in 2024.
In short, while Chairman Powell will be able to reflect on the resilience of the economy in the face of Fed tightening over the past year, we can’t assume a similar resilience going forward. The last year has seen a significant improvement in the U.S. economy with a sharp reduction in inflation even as unemployment has remained low and growth has remained strong. In order to maintain this progress, the Federal Reserve would be wise to avoid any further tightening of monetary conditions. A good start would be a balanced, rather than hawkish, Powell speech this week.
David Kelly is chief global strategist at J.P. Morgan Asset Management.