ECB warns of risks beyond tariffs: from security to capital flows
"This uncertainty extends beyond the calibration of new tariff regimes and includes the possibility of a broader set of non-tariff barriers, a deeper intertwining of economic policies and security policies and possible revisions to the treatment of foreign portfolio investors and foreign direct investors," Lane told an event in Brussels.
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Powell's Jackson Hole speech could setup a policy tweak that lasts well beyond his tenure
When Federal Reserve Chair Jerome Powell gives his last speech in Jackson Hole, Wyo., this Friday, investors will be listening for whether he signals an interest rate cut next month. But Powell could lay out more overarching changes to the central bank's dual mandate that will last long after his tenure is up next May — and mark part of his legacy. Powell will share his outlook for the economy at Jackson Hole. But he is also expected to lay out changes to the central bank's policy framework review, which articulates the Fed's strategy and commitment to fulfilling its congressional mandate for stable prices and maximum employment. In particular the central bank is expected to drop so-called average inflation targeting, a policy put in place pre-pandemic when inflation was running low and Fed officials wanted to avoid deflation. The strategy laid out that if inflation ran below 2% in years past, the Fed would tolerate it running above 2% in the future on the theory that it averages out. Given the recent spout of inflation, and the risks it poses to inflation expectations and consumer sentiment, the Fed is expected to drop that and focus on an inflation target of simply 2%. Read more: How jobs, inflation, and the Fed are all related Powell signaled the change in a speech in May. 'In our discussions so far, participants have indicated that they thought it would be appropriate to reconsider the language around shortfalls,' Powell said. 'And at our meeting last week, we had a similar take on average inflation targeting.' The Fed first created its monetary policy framework in 2012, which it adjusts every five years. The Fed is revisiting changes made to its strategy for monetary policy, tools, and communication last changed in 2020 before the pandemic set in. Just as the changes announced back in 2020 had implications for monetary policy actions over the past five years, so could the changes Powell announces Friday send ripples for years to come. Some Fed watchers believe the Fed's strategy of letting inflation run a bit above 2% to make up for previously lower inflation led in part to the central bank's delayed action to raise rates when inflation took off following the pandemic. The thought that the inflation from supply chain bottlenecks was temporary led the Fed to hike rates at the most aggressive pace since the 1980s. 'While the adoption of the new framework in 2020 was not the primary factor behind the Fed's delay and the substantial inflation overshoot, it contributed to this outcome,' said Matt Luzzetti, chief US economist for Deutsche Bank. Luzzetti says, as a result, he expects Powell's speech to restore a more preemptive strategy for monetary policy, along with recognizing risks of supply shocks and a return to a balanced view of inflation and the job market. James Fishback, CEO of hedge fund Azoria, agreed, noting that Chair Powell needs to acknowledge what he calls the 'mistake' of average inflation targeting, likening it to rushing into the emergency room with a 110-degree fever and being told the doctors won't treat you because, for the past two weeks, your average body temperature was a healthy 98 degrees. 'The Great Inflation of 2021–2022 did not begin in a supermarket or at a gas pump — it began in August 2020 in Jackson Hole, Wyoming,' said Fishback. 'In his new framework review announcement on Friday, Chair Powell must acknowledge the tragic mistake of Flexible Average Inflation Targeting and strike it from the Federal Reserve's playbook if the Fed is to faithfully fulfill its dual mandate.' Powell noted in his May speech that inflation could be more volatile going forward than in the 2010s and that the US may be entering a period of more frequent, and potentially more persistent, supply shocks. 'The economic environment has changed significantly since 2020, and our review will reflect our assessment of those changes,' Powell said in a speech in May. Powell also stressed enhancing the Fed's formal policy communications, particularly regarding the role of forecasts and uncertainty. Investors will watch for whether the Fed rolls out changes to its quarterly Summary of Economic Projections, which contains the famous 'dot plot,' a compilation of each member of the FOMC's expectations for interest rates that year. Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
