Powell Set to Deliver ‘Profoundly Consequential’ Speech, Changing How the Fed Views Inflation

History will remember Paul Volcker and Jerome Powell as standing on the opposite ends of the inflation canyon, with the former taking desperate actions to try to tamp it down and the latter expected this week to announce an unprecedented effort to crank it back up, CNBC reports.

Volcker, the Federal Reserve chairman from 1979-87, ushered through a series of inflation-busting interest rate hikes that dragged the country into recession but won the fight against pricing pressures and spurred a powerful economic recovery.

Powell, the central bank chief since 2018, is likely to detail a set of measures aimed at pushing inflation higher amid a coronavirus pandemic that has dragged the U.S. economy into one of its darkest hours.

While the average consumer might find it absurd to want to raise the cost of living, central bankers and economists see too little inflation also as a problem. It often reflects a slow-moving economy with a low standard of living. On top of that, the accompanying low interest rates give policymakers little wiggle room when crises happen and there’s a need to loosen policy.

That’s why Powell, who will speak Thursday during a virtual version of the Fed’s annual Jackson Hole, Wyoming, conference, will outline what could be the central bank’s most active efforts ever to spur inflation back to a healthy level.

The speech is titled “Monetary Policy Framework Review” and wraps up a yearlong examination both among central bank officials and with the public, during a series of open events, on what policy should look like in the future.

“The expectations are pretty high to get something meaningful on Thursday,” said Tom Graff, head of fixed income at Brown Advisory. “This is probably a historic speech.”

One phrase Powell is likely to use is “average inflation” targeting.

Simply, it means that the Fed, which has pegged 2% as a healthy level, will let inflation run higher than that for a while if it has spent a considerable time beneath that level. The Fed’s preferred inflation gauge has stayed below that level for all but two years since the Great Recession ended in mid-2009.

It’s a mirror-image reversal of Volcker’s inflation-busting and sets the stage for a pivotal policy move.

“Heading into Jackson Hole we are confident Chair Powell will use his speech Thursday to tee up a profoundly consequential and risk-friendly move to soft inflation averaging at the Fed’s upcoming September meeting,” wrote Krishna Guha, head of global policy and central bank strategy at Evercore ISI. Guha and his team expect the Fed to “seek a moderate inflation overshoot during the recovery phase of this cycle” as a way to avert “Japanification,” or an extended period low growth marked by weak inflation.

Along with the inflation move, the Fed also, as indicated by the minutes from its July meeting, appears likely to reinforce its commitment to full employment. The unemployment rate currently sits at 10.2%, down from the 14.7% peak in April but well above the 3.5% pre-pandemic level in February.

Powell’s speech could include a vow as well to keep policy as accommodative as possible until inflation and employment are both stabilized.

To fulfill both pledges, the Fed will need to commit to keeping rates anchored near zero until the goals are met. Where the move to what it calls the “zero lower bound” had been previously considered unusual, it now will become standard practice at least until the Fed meets its mandate.

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