MainStreet Macro: Jackson Hole: Another Trip down the Snake River

Every year at this time, the Federal Reserve holds its high-profile annual conference in Jackson Hole, Wyoming. Some 120 central bankers, finance leaders, and academics gather to discuss wonky but important global issues. 

The highlight of the event is a Friday morning speech given by the head of the Federal Reserve – Jay Powell. It’s the only public part of the conference.

Last year, the conference was held virtually for the second year in a row due to worries about the then-rapidly spreading coronavirus delta variant. This year, the conference will take place against the backdrop of the Grand Teton mountains and the Snake River, with its wandering twists and turns.

But that won’t be the only way this year’s event will be different from last year’s. Here are three ways the economy has changed Fed policy over the past year.

From transitory to persistent:  The most visible economic transition over the past year has been the inflation picture. Consumer prices were heating up last August, rising 5.2 percent year-over-year.

This year, that measure is on fire, up 8.5 percent, just a smidge off its high in July. With price increases accelerating, the Federal Reserve’s take on inflation has changed. It no longer regards the buildup in price growth as transitory and tied to pandemic-related supply shocks that would disappear quickly. The term transitory, in fact, was retired several months ago.

Instead, the Fed chair has noted recently that not only was this bout of inflation broad-based and persistent, future shocks to global supply could buck historical patterns, too, and have a more long-lasting effect on inflation.

From recovery to tightness:  Last year at this time the labor market was 5.7 million jobs away from its 2019 level and the jobs recovery was continuing at full steam. Powell’s 2021 Jackson Hole speech suggested that more nurturing was in order, and Fed policymakers hesitated to raise rates, even in the presence of higher inflation, out of concern that such a move might weaken the jobs recovery. 

This year the labor market has, in the Fed’s words, “become tight to the point of unhealthy”.  With the Bureau of Labor Statistics reporting more than half million jobs created in July and openings just slightly lower than record highs, demand for labor is outstripping the available supply of workers for hire.

That has led wage growth to accelerate, rising more than 6 percent in recent months, more than 3 percentage points higher than the average during the 10 years of expansion preceding the pandemic.

From vigor to weakness: Gross domestic product was strong in 2021, finishing the year up 6.7 percent. Our economic fortunes have changed quite a bit since then. GDP fell 1.6 percent in the first three months of 2022 and is estimated to have contracted by 0.9 percent in the second quarter. 

The verdict is still out whether the slowdown was broad enough to be defined as a recession, a call that likely will hinge on whether consumer spending can hold up in the midst of price increases.

My Take

As conference participants return to Wyoming, they might see, in the Snake River’s winding path, an analogy to the shifting economy we’ve witnessed over the past two years.

As an attendee at this year’s Jackson Hole gathering, I’ll be listening for hints of the Fed’s future direction as it navigates the twisting and turning economy.