At an annual Federal Reserve gathering in Jackson Hole, Wyoming, keynote speeches from Fed Chair Jerome Powell and European Central Bank President Christine Lagarde on Friday laid out the challenges each is facing in deciding if they should extend historic strings of rate increases that began last year. At the same time, they offered investors few clues as to whether they would in fact do so in the coming months.
“These structural shifts we heard about, we all know they’re important. We all know they’re big. Central banks can’t do much about a lot of them,” said Kristin Forbes, a Massachusetts Institute of Technology economics professor and former Bank of England policymaker. Powell, in his speech, remained vague about whether the Fed would lift its benchmark rate again, though he warned that “additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy.”
Others, including Philadelphia Fed President Patrick Harker and Banco de Portugal Governor Mario Centeno, took the opposite side, arguing for a cautious approach as they assess the impact of previous hikes.The resilience of the US economy has investors and economists debating whether the neutral rate of interest — where policy neither slows down nor accelerates the economy — has shifted higher. That would imply policymakers need to raise rates even further to curb inflation.
“When you start introducing these kinds of frictions, it’s going to make large segments of the economy less sensitive to monetary policy,” said Katheryn Russ, professor of economics at the University of California, Davis, who presented a discussion on a paper about supply chains.
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