[Insight & Opinion] The Jackson Hole Meeting Stands Between Hawkishness and Neutrality

Powell Says "I Don't Know" the Level of the Neutral Rate
Keeps Options Open with Cautious Remarks

History does not repeat itself exactly. The Jackson Hole Meeting, which drove the 2023 stock market into a frenzy of fear, has ended, and fortunately, the New York stock market responded with gains. The main topic before this Jackson Hole Meeting was the future policy direction of the Federal Reserve (Fed). It boiled down to three issues: whether to maintain the inflation target of 2% set as the policy goal, whether to raise interest rates further, and whether to mention the neutral interest rate. The neutral interest rate refers to an ideal policy rate that neither cools nor overheats the economy. It is often considered the long-term policy rate level that the Fed aims for, typically based on the 'long-term policy rate projections (median)' of the Federal Open Market Committee (FOMC) members, which the Fed announces every three months. Overall, Fed Chair Jerome Powell left several options open due to the high uncertainty in the future economy. Although he might appear hawkish, he seemed to maintain a neutral stance between hawkish and dovish positions.

First, at the beginning of his speech, Chair Powell stated, "My speech this year will be a bit longer, but the message is the same as last year: it is the Fed's job to bring inflation back to our 2% target, and we will do so." Amid ongoing debates about whether the Fed's '2% inflation target' is appropriate, he appeared to maintain the position that raising the inflation target would not stabilize inflation. He expressed concern that the U.S. economy is holding up well despite high interest rates.

Second, despite changes in circumstances since last year, the hawkish stance was maintained, and the possibility of further rate hikes was left open. Although inflation has eased from a peak of 9% to the 3% range, the possibility of one more rate hike still remains. The inflation data from the past two months is encouraging but insufficient, and since inflation is trending upward, the Fed left open the possibility of raising rates based on data. What is clear is that the rate hike cycle is nearing its end.

Third, although the current policy rate is higher than the neutral rate, Powell responded that the level of the neutral rate is unknown. Since he did not make any remarks about raising the neutral rate level, the market welcomed this. The Fed viewed the neutral rate around 2.5% in June. Excluding the long-term inflation outlook (2%), about 0.5% was considered the real neutral rate. Typically, long-term rates reflect the bond market’s long-term view on the economy and inflation, following the neutral rate trend discussed below. The neutral rate estimate acts as an upper bound for ultra-long-term rates such as the 30-year bond yield. His cautious remarks seem to reflect the current sharp rise in long-term rates.

Now, the risk lies more in raising rates too much than too little. It is fortunate that Powell maintained a balanced view on both rate hikes and cuts. By mentioning the unnecessary harm that rate hikes could cause, he helped ease concerns. There is no need to be disappointed just because his remarks did not sound dovish. Central banks live on trust and must prioritize policy consistency. Given the poor supply-demand situation of U.S. Treasury bonds, it would be ideal if long-term bond yields stop rising and help stabilize interest rates, exchange rates, and stock prices. The growth, inflation, and employment figures we face are lagging indicators. With the world’s attention focused on the economic trajectories of the U.S. and China, we hope for a soft landing for the global and our economy.

Jo Won-kyung, Professor at UNIST, Director of the Global Industry-Academia Cooperation Center