Chairman Jerome Powell’s keynote speech at this year’s Jackson Hole conference will be scrutinized for any hints that the Fed intends to keep borrowing rates high for a prolonged period
A year ago, Chair Jerome Powell delivered a stark warning: To fight persistently high inflation, the Federal Reserve would continue to sharply raise interest rates, bringing “some pain” in the form of job losses and weaker economic growth.
One after another, economists have postponed or reversed their earlier forecasts for a U.S. recession. Optimism that the Fed will pull off a difficult “soft landing” – in which it would manage to reduce inflation to its 2 per cent target without causing a steep recession – has risen. Nearly seven in 10 economists polled by the National Association for Business Economics say they’re at least somewhat confident that the Fed will achieve a soft landing, according to the NABE’s latest survey.
Accordingly, the average fixed rate on a 30-year mortgage has topped 7 per cent, the highest level in 22 years. Auto loans and credit card rates have also shot higher and will likely weaken borrowing and consumer spending, the lifeblood of the economy. “We’re not totally out of the woods yet, for banks or the economy,” said Raghuram Rajan, an economist at the University of Chicago and former head of India’s central bank.
Oscar Munoz, chief U.S. macro strategist at TD Securities, said the Fed’s initial rate increases were merely the equivalent of lifting its foot off the accelerator. By Munoz’s calculations, only since the start of 2023 has the Fed’s benchmark rate been high enough to slow growth. He thinks it could take up to another year for the full impact of the rate increases to be felt.
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