KEY POINTS

  • Central bankers worry that stagnant inflation portends a slowing economy
  • Bahnsen expects Powell to reiterate that the Fed does not see any inflation on the horizon
  • Inflation “fell dramatically” following the onset of the COVID-19 pandemic.

Speaking at the Federal Reserve's annual conference Thursday, Fed Chairman Jerome Powell is expected to unveil measures designed to push up inflation amid the economic carnage wrought by the COVID-19 pandemic – a difficult task during a prolonged period of low interest rates.

(Due to the COVID-19 pandemic, the symposium will not be held in the mountain resort of Jackson Hole, Wyoming, where it has convened for almost 40 years. But the event will be live-streamed to the public Thursday and Friday.)

Central bankers worry that stagnant inflation portends a slowing economy. The Fed sees 2% as an attractive target rate of inflation, but consumer prices have consistently remained below that level for most of the past decade.

“The expectations are pretty high to get something meaningful [done] on Thursday,” Tom Graff, head of fixed income at Brown Advisory, told CNBC. “This is probably a historic speech.”

David Bahnsen, chief investment officer at The Bahnsen Group, a wealth management firm based in Newport Beach, Calif., told International Business Times that he expects Powell to reiterate that the Fed does not see any inflation on the horizon. He also said while the Fed will stay “data- dependent,” its posture will likely focus on growth and credit availability rather than the fear of inflationary forces resurfacing.

“We absolutely believe the Fed will move to a 2% average inflation target, allowing them to run above the 2% rate into the future -- if and when they achieve that,” Bahnsen added. “There is no part of the Fed monetary framework right now focused on defending against inflation, and Powell is not going to pretend they are focused on it now. He is exceedingly concerned with the disinflationary forces he sees in the economy, and has gone to the [former Fed chief Ben] Bernanke and [former European Central Bank president Mario] Draghi playbook to fight deflation at all costs.”

Jack McIntyre, portfolio manager at Brandywine Global Investment Management in Philadelphia, told IB Times that Powell needs to send the message that the Fed is still more worried about low inflation than an uptick in inflation.

“If he doesn’t, look for risk markets to send a clear signal that too much monetary policy euphoria is being discounted,” he said. “[Powell] will likely imply the Fed is going to use outcome-based forward guidance – as opposed to calendar-based – which may include running accommodative monetary policy even if inflation reaches their 2% threshold.”

McIntyre added that he didn’t think Powell will say much beyond that as he “doesn’t want to steal the thunder of the [Federal Open Market Committee] at their September meeting.”

Steve H. Hanke, a professor of applied economics at Johns Hopkins University and who served on President Reagan's Council of Economic Advisers, told IB Times he believes Powell will give himself license to overshoot the Fed's inflation target by an amount “commensurate with the amount it has undershot its inflation target in the past.”

In the minutes from the Fed’s July meeting, the central bank stated that consumer price inflation – as measured by the 12 ‑ month percentage change in the price index for personal consumption expenditures, or PCE, through May – remained well below the rates that prevailed early in the year.

“Inflation was projected to remain subdued this year, reflecting the substantial amount of slack in resource utilization and the sizable declines in consumer energy prices earlier this year,” the Fed added.

But John Kaprich, investment director at Aware Asset Management in St. Paul, Minn., told IB Times the Fed’s priority is to fix the economy now and worry about inflation later.

“The Fed remains concerned about the impact of a COVID resurgence and will be reluctant to change its current trajectory until uncertainty is eliminated,” he said. “In addition, the central bank will call for fiscal stimulus to help maintain consumption.”

Kaprich noted that inflation expectations are still low from a historical standpoint. “The labor market remains weak with new job losses coming and the recent [Purchasing Managers' Index] surveys support this. The Fed will adopt Average Inflation Targeting, as they view inflation has room to run.”

(The Peterson Institute for International Economics said of Average Inflation Targeting: “Instead of aiming to return inflation over the medium term to the target rate of 2%, the Fed would aim to return the average of inflation over some period to the target rate. The crucial innovation of AIT is that when inflation has been running below the target rate, it would have the Fed aim for above-target inflation in the future, in order to bring average inflation up toward the target.”)

A research study released on Monday by the Federal Reserve Bank Of San Francisco found that inflation “fell dramatically” following the onset of the COVID-19 pandemic.

In February, prior to the outbreak in the U.S., the year-over-year change in core PCE inflation stood at 1.9%, close to the Fed’s 2% inflation target. By April, it had dropped to 0.9%, the lowest level since 2010.

“A majority of the drop in core personal consumption expenditures inflation comes from a large decline in consumer demand,” wrote Adam Hale Shapiro, a research advisor at the San Francisco Fed. “This demand effect far outweighs upward price pressure from COVID-related supply constraints.”