Top Economist: Powell should seize the "golden opportunity" of Jackson Hole

Chief Economist Adrian of Allianz recently wrote that this week, Jerome Powell will face challenges at Jackson Hole, where he needs to seize this golden opportunity to re-establish the effectiveness of his forward-looking policy guidance, or risk further damaging its policy effectiveness and reputation. Here are his main points.

Welcome to Jackson Hole Week. This gathering will discuss recent economic and financial developments, policy issues, and their implications for central banks.

This year, the speech by Federal Reserve Chairman Powell is highly anticipated, as the United States is experiencing economic uncertainty and financial market volatility, with these issues spreading worldwide. In a context of genuine uncertainty—including uncertainty at both the domestic and global levels in the United States, this uncertainty is exacerbated by the erosion of three key stability anchors: stable economic growth, effective forward-looking policy guidance, and excessive leverage and risk-taking behavior among market participants.

This is why Powell needs to seize this golden opportunity on Friday to regain control of the economic and policy narrative.

The primary goal of the Federal Reserve this year should be to re-establish the effectiveness of its forward-looking policy guidance. It must also continue to rebuild its credibility and international standing, both of which have been damaged by mistakes over the past four years, including policy implementation delays, inaccurate forecasts, communication confusion, and banking supervision failures.

We received a reminder in early August when the market and Wall Street analysts overreacted to the release of three data points showing weaker-than-expected labor market conditions. Noteworthy was not only the sharp fluctuations in stock prices and the astonishing surge in the VIX. The short end of the U.S. yield curve also experienced unstable fluctuations, largely influenced by Federal Reserve rate guidance, affecting financial, corporate, and economic interactions in the United States and globally.

Although the sudden and substantial deviations in prices were corrected in the following two weeks, this unsettling event felt like a warning of the inherent instability in the financial system. Analyst views exacerbated this sense of insecurity.

Some prominent Wall Street analysts and financial observers called for the Federal Reserve to immediately implement emergency inter-meeting rate cuts, a move I believe is unnecessary and potentially harmful. Just days ago, economists who were optimistic about the economy hastily raised their estimates of the probability of an impending recession. A Wall Street bank even declared that the U.S. economy had entered a recession. The prevailing sentiment is that the Federal Reserve is once again lagging behind the situation, much like its failure to promptly address rising inflation in 2021, a mistake that continues to have adverse economic, political, and social consequences.

In an article I wrote in July, I outlined eight critical issues for the well-being of the U.S. economy and global financial stability, hoping that Powell can cover them ideally this week. Of course, we live in an imperfect world. But having a benchmark standard is crucial.

I do not expect Powell to cover all the points I raised. But I, along with others, will encourage him to clearly discuss three aspects: how the current economic and policy conditions are, what the policy objectives look like, and how the Federal Reserve will achieve these objectives. Particularly important is that people should have a clearer understanding of the new neutral interest rate (neither stimulating nor restraining economic activity) when leaving Jackson Hole, understanding the path to reach this rate, and the practicality of "sustainable 2%" What does the inflation target mean.

Without such clarity, we should expect new market instability, threatening economic well-being, and the Federal Reserve may further damage its policy effectiveness and reputation. At the same time, countries around the world will seek more ways to reduce their economic and financial system's reliance on the Federal Reserve, which no longer responsibly anchors the international monetary system dominated by the US dollar.

Yes, there are many unresolved issues this Jackson Hole week