The Fed’s Future Path: What Powell Should Reveal at Jackson Hole
Elections are difficult for independent central banks, particularly those that are controversial. Monetary policymakers are evidently afraid of being labeled as partisan, thus they are unable to discuss openly about the implications of the candidates’ policy ideas or predict which macroeconomic measures will be selected next. It is nearly impossible to make a realistic conditional prognosis, much less one that is made public.
Plans for monetary policy, however, must take into account the outcome when an election is unclear and the parties hold divergent views on trade, currency, fiscal, and regulatory policy, as is the case in the US at the moment.A abrupt change in policy will be especially harmful because markets and the public are overwhelmingly confident that the Federal Reserve will begin a cycle of interest rate reductions in September and continue doing so through 2025 and 2026.
Like other central banks, the Fed dislikes making sudden changes in policy unless there is a clear and present danger, such as the bankruptcy of Lehman Brothers and AIG in September 2008 or the Covid pandemic in March 2020.However, considering the post-election economic picture in the US, the Fed and the public must brace for at least the very real possibility of a change toward tightening by mid-2025.
Either a Trump or a Harris administration will probably have lax fiscal policies. Additionally, there will be a bigger risk of inflation if Trump wins.Tariffs would increase significantly for a variety of nations and industries, which would cause inflation.Large-scale deportations of migrant workers, as Trump and the Republicans intend to do, would cause stagflation by substantially reducing productivity and driving up prices due to labor shortages in specific sectors.
Under Trump, the energy, labor, and environmental sectors would all see deregulation, leading to an unsustainable boom that would also promote inflation by shifting the focus from large, green tech to outdated manufacturing and fossil fuels. He and his running mate have put the Fed’s autonomy and the value of the dollar at jeopardy.
Naturally, it’s possible that neither the inflation nor the necessity for a rate increase will occur. It’s possible that the US is already on the verge of a recession, which will be too great for this year’s anticipated 50–75 basis point Fed rate reduction and budgetary slack.Restrictive net fiscal policy could arise from political collapse, possibly as a result of the upheaval following the election outcome.A Trump administration’s mass deportations could have a greater and quicker recessionary impact than an inflationary one. Despite all of that, there is still a good chance that inflation will pick up speed in 2025.
What, therefore, ought Fed Chair Jay Powell to say when he speaks at the Jackson Hole central bankers’ symposium this coming week?
Even though the Fed is planning rate reduction in the upcoming weeks, he should make it plain that its monetary policy stance could change after the election.He should also reaffirm the fundamentals of economics to households and markets.
Powell has previously boldly and correctly stated the advantages of migration on the supply side. He ought to restate the stagflationary consequences of mass deportations and emphasize that since US buyers bear the lion’s share of the tariffs, they would exacerbate inflation.Additionally, he ought to give the standard speech by a central banker on how the present fiscal trajectory is unsustainable.
Oftentimes, even during highly controversial elections, central bankers worldwide are forced to act as truth checkers for the general population. The fact that the Fed now needs to do this demonstrates how bad the political discourse in the US has become over economic policy.Someone needs to remind the public of certain fundamental facts about economic policy, just as the Bank of England did before Brexit or as central banks did in developing nations that are vulnerable to high inflation, all the while keeping neutrality toward the rival parties or candidates.
This has nothing to do with influencing the results of an election or the policies chosen by an elected president.This has to do with telling the American people the truth about the dangers that monetary policy faces.
The Fed needs to begin preparing for a potential pivot now rather than waiting to see if the circumstances that would lead to a policy reversal would not materialize or believing that it would be more politically prudent to alter course while inflation is already occurring. Markets and consumers will be in for a shock if the shift in prediction is left to a surprise in November, or if it is delayed until the federal budget is approved by Congress in March or April of next year. That would exacerbate the harm done by the mistakes that any administration, regardless of party, will unavoidably make.
