The Fed’s Golden Path

Stocks opened modestly higher this morning (Dow +160 pts; SPX +.3%). Commodities aren’t moving much, and the bond market is trying to rally after a two-week decline. All in all, this is a pretty muted reaction to the Federal Reserve’s much-anticipated Jackson Hole meeting.

Fed officials kicked off their annual conference in Jackson Hole today and a slew of speeches and interviews make clear one point: the economy is too strong to convince them that inflation is beaten. Loretta Mester, Cleveland Fed Bank President, is surprised at the economy’s resilience even as interest rates are now high enough to restrict growth. In a CNBC interview she said core inflation above 4% is still too high so the Fed is not considering reducing interest rates any time soon. However, she did acknowledge the Fed’s difficult balancing act. “We have to be very careful. We don’t want to overtighten. We don’t want to undershoot. It’s all about risk management now.” She said the economy will have to slow in order to really get inflation under control, but the goal is to do this without triggering recession.

Former Fed official Richard Fisher praised Fed Chair Powell and his advisors in another interview this morning. He said, “there’s no precision [in monetary policy]. It’s a matter of judgment.” And Mr. Powell’s long experience makes him the right man for the job. That he is following a determined course to bring the economy back into balance is “good news.” Mr. Fisher said that course may include another interest rate hike in the near future. But he believes the economy can handle it. Asked when he expects the Fed to begin reducing rates below what is considered “restrictive,” he guessed the end of 2024. In his view, there’s no need for the Fed to cut rates now.

Finally, I’ll highlight comments by Austan Goolsbee of the Chicago Fed. He defines the best case scenario as getting inflation down to 2% without causing a “big” recession. This is what he refers to as the “golden path.” It is definitely possible, but not assured. And avoiding a recession certainly doesn’t mean the economy won’t go through a sluggish period. And he does expect that. When asked about the health of the US consumer he said, “The most interesting/unusual thing…is that the interest rate is up as much as it is and you really haven’t seen consumer spending deteriorate in a way that would be traditional.” If spending can remain steady in the face of Fed tightening, the golden path looks possible.