A year ago, Jerome Powell made his and his committee colleagues’ mission clear: “The Fed’s job is to get inflation down to its 2% goal, and we’re going to do that,” he said.
Although inflation has declined, it has not yet reached this benchmark. Additionally, the less considered half of the Fed’s dual mandate—unemployment—is starting to cause some trouble.
This factor has led JPMorgan CEO Jamie Dimon to question whether the Fed’s mission can be accomplished.
“There’s a lot of uncertainty,” Dimon, 68, said in a CNBC interview published yesterday. “I’ve always pointed to geopolitics, I’ve always thought deficits, spending, quantitative tightening, elections — all of these things can cause panic in the market, so We’ll have to wait and see.
“Is inflation really going to go back to 2%?” the Wall Street veteran continued. “I’m a little skeptical about that.”
He explained that this reasoning is based on future factors: “I don’t focus so much on short-term data as on data that is inflationary but in the future.”
“Deficits, spending, the green economy, the remilitarization of the world. They haven’t really happened yet, but they’re going to happen – and they’re not really deflationary.
Dimon has repeatedly stressed JPMorgan’s readiness for a range of economic outcomes, but he’s also less certain than his peers about a soft landing. While analysts at UBS and others see a soft landing as the base case, Dimon puts the probability at between 35% and 40%.
“It’s always good to look at the possibilities of your ideas, rather than settling and saying, ‘This is what’s going to happen,'” Dimon added. “There’s always a variety of outcomes and we’re all going to get through this. So I’m fairly optimistic that if we have a mild recession or even a more severe recession, we’ll be fine.
“Of course, I have a lot of sympathy for people who have lost their jobs. You don’t want a hard landing. But there’s a lot of uncertainty,” Dimon added.
Before the 2% cut
While Powell made it clear that he was on a mission to get inflation to 2%, he did provide relief to markets by saying he would cut rates before hitting the benchmark if inflation trends in the right direction.
“If you wait until inflation gets all the way down to 2%, you may have waited too long because the tightening you are implementing, or the degree of tightening you have, will still have an impact, which may push inflation below 2%,” Powell told the Economic Club of Washington, D.C., in July.
Powell was speaking ahead of a release from the U.S. Bureau of Labor Statistics, which put the job in trouble.
On Friday, the Labor Department reported that the unemployment rate rose to 4.3%, triggering the Sahm Rule, which indicates whether the economy is about to enter a recession, and kicked off several days of turmoil in the stock market.
Since maintaining employment is the Federal Reserve’s task in the second half of the year, analysts hope to cut interest rates in September to stabilize the job market.
For the Fed, the balance between employment and inflation is a delicate one: If employment is high, it means the economy is still overheating. Even if inflation falls and employment remains high, a rate cut by the Fed could trigger a burst of economic activity as borrowing costs and household spending fall. This, in turn, could force prices to rebound quickly.
The balance between the two is one reason why experts are calling for flexibility around goals. One of the plan’s backers is Mohamed El-Erian, Allianz’s chief economic adviser and dean of Queen’s College, Cambridge.
“The Fed would be better off seizing this opportunity to make a belated shift to more strategic policy rather than maintaining a policy that relies too much on backward-looking data,” El-Elerian wrote in an April opinion column for Bloomberg News. reaction function.
“Such a shift would recognize that optimal medium-term inflation levels in the United States are closer to 3%, giving policymakers the flexibility to avoid overreacting to the latest inflation data.”
