At Jackson Hole, Powell faces a crucial test!

Jerome Powell faces a crucial test: rising unemployment, increasing evidence that inflation is under control, and benchmark interest rates still at their highest level in 25 years. With the Fed expected to cut interest rates for the first time at the September 17-18 meeting, Powell may provide more information on policy easing methods at the Jackson Hole conference on Friday, signaling the possible end of high rates. However, given that the Fed's policy rate has remained in the range of 5.25%-5.50% for over a year, the relatively high borrowing costs may still be exacerbating the economy's impact, and even if the Fed starts cutting rates, this impact may take some time to fade. This dynamic could pose risks to the hope of a "soft landing." Former Chicago Fed President Evans said: "Powell said the labor market is normalizing, wage growth is slowing, job vacancies remain healthy, and the unemployment rate roughly aligns with policymakers' view of the 2% inflation target set by the central bank. If that's all there is, that would be good. But history is not optimistic." In fact, as seen in recent months, rising unemployment rates typically continue to rise. "It doesn't look like that now, but it may only take one or two soft employment reports to necessitate aggressive rate cuts to counter the rising unemployment," Evans said. "The longer you wait, the harder it is to make actual adjustments." Events of the past two years and the upcoming Fed policy review have sparked a lot of research aimed at exploring why inflation is falling, what role policy plays in it, and how to take different approaches if inflation risks rise again. Some research findings have emerged from Fed researchers, including top economist Michael Kiley. He wrote a paper questioning whether the "asymmetry" of policy really helps, such as different approaches to dealing with insufficient employment and tight labor markets. Powell is now facing a test in the labor market. Inflation is returning to the path of 2%, but the unemployment rate has risen to 4.3%, up 0.8 percentage points from July 2023. There is controversy over the true meaning of the labor market and the increase in labor supply, but it does break a "Sam rule." In other words, the employment shortfall that Powell promised to respond to four years ago may already be taking shape. While Powell may be reluctant to declare victory over inflation to avoid overreactions, Ed Al-Hussainy, Senior Global Rate Strategist at Columbia Threadneedle Investments, says now is the time for the Fed to act early to address the risk of unemployment — a different type of preventive measure. Al-Hussainy said the Fed has proven its ability to control public expectations of inflation, but this has also brought downside risks to employment Al-Houssaini said, "The current policy stance has deviated too much, it is too tight, and action needs to be taken (interest rate cut)."