By Arun Malhotra
The message was very loud and clear. The theme of the Jackson Hole Symposium was the Constraints on Economic and Policy post the pandemic. The supply imbalances and the resulting Inflation remains the biggest concern for the U.S Central bank. Jerome Powell was very categorical in stating the FOMC focus is to bring the inflation under 2 percent goal. The hawkish tone reflected that there may be few more hikes before the central bank gives it a pause. The higher interest rates will bring down the growth and may also reduce the favourable environment currently existing in the job market, but that is a pain the economy will have to bear to bring price stability. Rising commodity prices and supply disruptions are causing the inflation high across countries, with U.S inflation all time high and U.K inflation going up to mid-teens in 2023. The biggest challenge for all central banks is to manage the balance between price stability and growth.
The Economic Policy symposium deliberated on the aftereffects of pandemic and the related economic disruptions causing erratic supply bottlenecks, while the easing money supply unleashed by the central banks has caused an increase in aggregate demand causing the imbalances in demand and supply, and hence the price rise.
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Majority of the country’s balance sheets are not in the best shape to provide any fiscal response, especially without hurting growth. The inflation that seemed transitory in nature seems here to stay for longer than what most central banks thought, and the response has been slow. The challenge is the economic growth that has seen signs of slowing down due to rising rates. The risk of hurting growth and labour market, causing higher unemployment will have to be borne by the economy and may exist for some more time. Restoring price stability will require maintaining a restrictive policy stance for some more time was the clear message in Powell’s address. The impact of past hikes is still not fully reflected in the economic data, as wage markets are still strong, and the consumer price is still rising. Powell remarked that the central bank will use its tools forcefully to bring down the inflation, which may hurt economic growth.
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The markets also reacted negatively to these announcements as there was slight expectation that falling commodity prices may reduce the expectations of further inflationary pressures and less aggressive stance of the central bank in the future. The speech also indicated the risks of loosening the policy prematurely. The equity markets fell while the yields across the US treasury curve climbed. The environment clearly spelt out the risks inherent in the economy due to high inflation, and the resulting impact on businesses that also might lead to job losses, but all that pain needs to be borne by the economy. The central bank doesn’t want to loosen the grip and repeat the past mistakes of loosening rates too early in the cycle. There was complete clarity on the future actions of the U.S central bank and calibrating businesses to be ready to bear some short term pain. The host of economists, central bankers and the policy makers from across the world put across their concerns and diverse perspectives to address the economic challenges post the pandemic and steps needed to restore price stability with least impact on the global growth.
Arun Malhotra, founding partner & portfolio manager at CapGrow Capital advisors. Views expressed are the author’s original