This year’s Jackson Hole Symposium will unquestionably be the most important event this month. Central bankers and analysts will face a unique economic backdrop much different than last year’s symposium. Last year inflation was running at approximately 5% and the assumption amongst the vast majority of central bankers and policymakers was that inflation was transitory.
Powell might take a more dovish stance based on recent reports revealing a major contraction in the U.S. economy. The new home sales report revealed that sales have plunged to the lowest level in six years. The S&P Global U.S. service sectors index declined from 47.3 to 44.1. This was the fifth consecutive decline resulting in the weakest numbers since May 2020. Also, the U.S. manufacturing index dropped from 52.2 to 51.3 the lowest level in two years.
It is clear that the Federal Reserve was extremely slow to react to rising inflation and the series of four consecutive interest rate hikes over the last four FOMC has had a profound impact resulting in a strong economic contraction. The Fed did too little too late and is now facing a much more difficult challenge which is to effectively bring inflationary pressures down without a further major economic contraction.
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