On Friday, Federal Reserve Chairman Jerome Powell will deliver his speech at the annual symposium in Jackson Hole, Wyoming.
The widely anticipated event will provide some guidance on the Fed’s policy going forward.
To help market participants, Powell will need to be clear on when the Fed will stop raising rates, said Gary Wagner, editor of TheGoldForecast.com.
Wagner spoke with David Lin, presenter and producer at Kitco News.
“The main thing [market participants] I want to understand is when will the Federal Reserve stop raising rates…and more importantly when will it start to relax or in other words cut the federal funds rate,” Wagner said.
The Fed raised its rate by 225 basis points from January to July. The inflation rate in July was 8.5%, compared to 9.1% in June.
Prior to the Jackson Hole speech in 2021, Wagner predicted higher inflation through 2022, when the Fed had yet to raise rates.
“If you listen to some of President Powell’s statements, over the last two months, he recognized that they should have acted sooner,” he said. “I really believe that if they had started using their toolkit sooner, we wouldn’t be facing 8.5% inflation today.”
The Fed’s forecast errors
The Fed failed to forecast inflation accurately, and so failed politically, Wagner said.
“At the last symposium in Jackson Hole… [The Fed] was always under the assumption that inflation would be transient, that it would naturally come out of the system,” he said. “If they had started with small rate hikes of 25 basis points a year earlier, they could have had a series of them that wouldn’t shake the economy as quickly and as hard as it did. “
At the same time, Wagner acknowledged that unforeseen events beyond the Fed’s control also caused prices to rise. He called the war in Ukraine a “joker” that drove up oil prices “like a second-stage booster on a rocket.” He also said food and energy prices, in general, were unlikely to be affected by Fed policy.
The unemployment rate in July was 3.5%, a low rate despite high inflation and shortages in the supply chain.
However, Wagner predicted that once the labor market reaches a new equilibrium, there will be “one job for every two people looking for one”, although he didn’t see that happening anytime soon. .
Other labor market indicators also look favourable, with wages and salaries up 5.3% from a year ago.
Some economists worry about rising wages in times of inflation because they argue that higher wages can lead to higher inflation as companies raise prices to offset higher costs.
Wagner said that while wages were not a “critical” factor in inflation, they were “a very important and very important piece of the puzzle”.
“We got to where we are because of several things that happened,” he said. “And the thing is, higher wages have definitely added to the inflationary pressures that we’re seeing now.”
For Wagner’s forecast for the price of gold, watch the video above.
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