At the Jackson Hole Summit, Jerome Powell made it clear the Federal Reserve remains focused on combatting inflation despite recession signals rising in tandem. To wit:
“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
While the Federal Reserve is focused on fighting inflation and willing to cause “some pain” to achieve victory, they hope to do so without evoking a recession. Such may be a challenge for two primary reasons:
- The Fed remains focused on lagging economic data, such as employment, which are highly subject to future revisions, and;
- Changes to monetary policy do not show up in the economy until roughly 9-12 months in the future.
The second challenge is the most important.
There is little doubt we are amidst an economic slowdown. With the Federal Reserve focused on combatting inflation by tightening monetary policy, thereby slowing economic demand, logic suggests that economic data trends will continue to decline.
As the Fed continues to hike rates, each hike takes roughly 9-months to work its way through the economic system. Therefore, the rate hikes from March 2020 won’t show up in the economic data until December. Likewise, the Fed’s subsequent and more aggressive rate hikes won’t be fully reflected in the economic data until early to mid-2023.