"Navigating by the stars under cloudy skies"

Who would have thought that Fed Chair Jerome Powell had so much poetry in him? Yet the title of this post is taken from the concluding paragraph of his speech today at the annual Jackson Hole economic policy shindig.  The rest of the speech is more prosaic, but offers some useful insights into how the Fed views its progress against inflation over the past eighteen months or so and what remains to be done. TL:DR version: recent developments are encouraging, but the job is not finished and rates will stay high for some considerable time.  Some highlights: 

The Fed mainly focuses on the personal consumption expenditure deflator to monitor inflation trends; this is a holdover from the Greenspan era. However, it remains committed to bringing the more familiar CPI down to the 2 percent target: "Two percent is and will remain our inflation target".  Given that the target is in fact up for renegotiation in 2025, and given musings in some quarters (hi there, Paul Krugman) that a slightly higher target might have some merit, this is a very strong statement of intent from Powell. 

Within the PCE measure, the Fed looks more closely at core PCE (i.e. excluding food and energy), and it breaks core PCE into three sub-components, for goods, housing services and non-housing services. 

• Core goods inflation has fallen sharply, which Powell attributed to unwinding of supply chain issues, along with tighter monetary conditions. Although core goods prices fell in the last two months, this measure remains well above its pre-COVID level. 
• Costs for housing services responded quickly to Fed tightening but it will still take some time for the full effects to be felt, because not all leases expire at the same time. The Fed expects this measure to settle near its pre-pandemic level. 
• Core non-housing services, accounting for more than half of core PCE,  may be the Fed's most intractable problem.  These prices were less subject to international supply issues during the pandemic but are generally labour-intensive, which presents a problem when the job market is so tight. 

Looking ahead, while continued unwinding of pandemic-related issues will be helpful, the Fed believes a period of below-trend economic growth will be needed to get inflation back to the target. Real interest rates have moved sharply higher over the past year, but the Fed is still "attentive to signs that the economy may not be cooling as expected", so that "additional evidence of persistently above-trend growth....could warrant further tightening of monetary policy".

The Fed is surprisingly relaxed about the state of the labour market. It sees rebalancing in that market as a contributor to easing pressure on nominal wages. Still, "Evidence that the tightness in the labor market is no longer easing could also call for a monetary policy response".

Powell ended his remarks by reminding his audience of the high level of uncertainty faced by policy makers, particularly as regards the lags with which monetary policy measures take effect. The Fed sees its current policy stance as restrictive, but -- paraphrasing here -- is it restrictive enough?  Having posed that question, Powell offered up his brief moment of poesy, before finishing with a blunt declaration: "We will keep at it until the job is done".