The Federal Reserve’s annual gathering in the Rocky Mountains is usually a time for central bankers and their wonky friends to kick back, discuss a few complicated economic topics and then go for a hike in the shadow of Grand Teton.
This year, the Fed’s Jackson Hole symposium, which wrapped up Saturday, was at times a tense affair and drove home how difficult the path ahead is for the US central bank.
On Friday, Chair Jerome Powell used his keynote speech to signal the Fed is headed for an interest-rate cut as soon as its next policy meeting in September. Yet there are clear divisions among policymakers over whether that’s the right call. Powell, himself, noted the economy has handed Fed officials a “challenging situation.”
Policymakers are grappling with inflation that’s still above their 2% goal — and rising — and a labor market that’s showing signs of weakness. That unnerving reality, which pulls policy in opposite directions, is made worse by a high degree of uncertainty about how each of those factors will evolve over the coming months.
“We’re getting some cross-currents and it’s in a difficult environment,” Chicago Fed President Austan Goolsbee said in an interview on the sidelines of the conference. “I always say the hardest job the central bank has is to get the timing right at moments of transition.”
The conference also highlighted the political pressures weighing on the Fed. Those are likely to intensify in coming months as President Donald Trump looks to put his stamp on what may be the most prominent federal institution to have so far escaped his overhaul attempts.
As Powell delivered his speech Friday morning, Trump said he would fire Fed Governor Lisa Cook if she didn’t resign over recent allegations that she committed mortgage fraud. It’s the latest attempt by the administration to pressure the Fed from multiple angles as Trump relentlessly pushes for lower interest rates.
Security for the event was noticeably heightened compared to recent years, adding to the tension at the gathering. Officers from the Fed Police, US Park Police and Teton County Sheriff’s Office, some in military-style fatigues and carrying weapons, were a constant presence.
Earlier Friday morning, officers had to remove one person, the Trump-backer and Fed gadfly James Fishback, after he confronted Cook in the lobby of the lodge and shouted questions about the mortgage controversy.
Rate Path
Powell, in what was likely his final Jackson Hole speech at the helm of the Fed, detailed the cloudy signals coming from the economy.
While the effect of tariffs on prices is now visible, there are still questions about whether that will reignite inflation in a more persistent way, he said. He called the labor market’s current status — with both falling demand for, and declining supply of workers — “curious.”
Even with those uncertainties, Powell opened the door to a rate cut at the Fed’s Sept. 16-17 meeting, though it wasn’t as clear a signal as at last year’s conference. Then, the labor market was deteriorating but inflation worries had receded, and many policymakers shared a desire to cut soon. The backing is not nearly as strong this year.
Recent data have shown inflation has stalled above the Fed’s 2% goal, with some measures indicating that price pressures may be spilling over to products and services not directly impacted by tariffs. Meantime, while hiring has slowed significantly over the summer, other labor market indicators, like the low level of unemployment, paint a more stable picture.
Without much clarity on how the economy will unfold, disagreements over how to proceed are festering among policymakers. Already, two governors dissented at the Fed’s July meeting, when officials didn’t cut rates. If they do cut in September, others may dissent in the opposite direction.
Policy disagreements could grow in the coming months as Trump names new officials to vacancies at the Fed and Powell’s term as chair ends in May.
Under Pressure
The discord comes at a time when the central bank is facing intense scrutiny from the White House. The topic seeped into conversations over coffee, during meals and in between sessions, even if there wasn’t much outright discussion of it during official conference proceedings.
Karen Dynan, an economics professor at Harvard University and frequent attendee of the conference, said she wasn’t surprised that central bankers didn’t want to wade into conversations about politics. Still, she said the conference set an example of how big-picture economic issues should be approached.
“This year it feels particularly meaningful that we have a bunch of papers that are grounded in good economics done by people who are prominent experts,” Dynan said. “These are not problems that can be solved by thinking about one’s intuition or talking to just a circle of people around you — you really need this sort of expertise.”
A New Framework
One issue that received less attention was the new framework Powell unveiled in his speech.
The document, which will guide policymakers as they pursue their inflation and employment goals, is the culmination of a months-long review of the previous one, implemented in 2020. The new strategy removes some of the language that more narrowly focused on the pre-pandemic challenge of persistently low inflation.
It’s a return to basics and sets the Fed up to more clearly focus on its mandates of maximum employment and stable prices, said Carolin Pflueger, associate professor at the University of Chicago Harris School of Public Policy.
In his remarks, Powell “emphasized that his job is inflation and unemployment, and that can only be achieved within an independent Fed,” Pfleuger said. “I think people appreciate that.”
Global Impact
That appreciation became apparent when Powell was greeted Friday morning with a standing ovation from economists and policymakers from around the world — and not for the first time this year.
For them Fed independence is not only a matter of principle but also practicality, since decisions taken in Washington inevitably come with consequences that spread far beyond.
The euro strengthened by 1% against the dollar following Powell’s remarks, adding downside risks to euro-area inflation that’s already seen falling to 1.6% next year.
“If a cut does come and reflects slower US growth, that probably means slower growth for them given the size of the US,” Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics and the former chief economist at the International Monetary Fund, said of the euro area and other economies.
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