Powell’s Jackson Hole Tightrope Walk: El-Erian Warns of Policy Peril

Jerome Powell faces his most delicate balancing act yet at Jackson Hole—navigating inflation fears against growth concerns while markets hang on every word.

The Fed's High-Wire Act

Powell must thread the needle between hawkish rhetoric and economic reality. One misstep could trigger volatility across risk assets—including crypto markets that feast on liquidity signals.

Market Jitters Amplified

Traders brace for policy nuance that could make or break short-term momentum. Crypto's correlation to traditional risk assets means Powell's tone matters more than ever for digital asset valuations.

Because nothing says 'stable monetary policy' like watching billion-dollar portfolios swing on a central banker's verb choice.

The data dilemma and shifting sands

None of this indicates an easy path forward. To offer real clarity on interest rates, Powell would need to decisively break away from his repeated full reliance on backward-looking data — an approach increasingly questioned by the very data it claims to follow. Last week's inflation numbers highlight this ambiguity: Although headline CPI inflation was lower than consensus forecasts, this was offset by significantly higher Producer Price Index (PPI) inflation and the unsettling rise in inflation expectations reported in the University of Michigan’s sentiment survey.

Story Continues JACKSON HOLE, WYOMING - AUGUST 25: President of the European Central Bank Christine Lagarde, Bank of Japan Gov. Kazuo Ueda (C), and chair of the Federal Reserve Jerome Powell (L) speak during the Jackson Hole Economic Symposium at Jackson Lake Lodge on August 25, 2023 NEAR Jackson Hole, Wyoming. Powell signaled in a speech Friday morning that if necessary, interest rates could be raised again. (Photo by Natalie Behring/Getty Images) · Natalie Behring via Getty Images

Powell could also find himself in a bind regarding employment. His ongoing focus on the headline unemployment rate, which has stayed stable at just over 4%, increasingly seems to rely too much on a single data point that conflicts with several other signs of a weakening labor market. These signs go beyond the notable surprise of the downward revision to the July jobs report, including companies' decreased hiring appetite, the difficulty recent graduates face in finding jobs, and opportunities that are concentrated in an unusually small number of industries.

Meanwhile, both the supply and demand sides of the labor market could be experiencing major structural changes, caused by forces that are difficult to understand with traditional economic models. The TRUMP administration’s crackdown on illegal immigration impacts the number of actual and potential workers. This occurs at a time when there are still significant questions about the long-term effects of artificial intelligence, especially the delicate balance between labor enhancement and displacement.

A framework under duress

This forms an uncomfortable backdrop for the unveiling of the new monetary policy framework, which is meant to provide the strategic overlay for the central bank’s pursuit of its dual mandate of low inflation and maximum employment. Its eagerly awaited unveiling follows the widely perceived failure of the previous iteration, which was essentially "dead on arrival."

Having been formulated in a backward-looking way heavily influenced by concerns about the effective lower bound on interest rates and persistent inflation undershooting, it proved to be poorly prepared for the unprecedented structural changes sweeping the global economy since 2020. Additionally, given the amount and duration of the inflation overshoot, Chair Powell has consistently refused to discuss an issue that some economists believe needs examination: the appropriateness of the current 2% inflation target in today’s structurally changing economy.

All these factors combine to put Powell in a tough spot as he also faces potential legal issues due to budget overruns on the Fed’s building project. Based on recent behavioral patterns, Powell would likely want to maintain maximum policy flexibility. However, this strategy risks increasing political pressure on the Fed’s independence and intensifying divisions within the FOMC. Conversely, signaling a major rate cut now could lead to the bond market steepening the yield curve in response, much like what happened last year.

Amid all this, an already narrowly defined Framework Review is unlikely to gain the strategic attention it desperately needs, leaving more important long-term policy issues unresolved.

Dr. Mohamed A. El-Erian is the chief economic adviser of Allianz and president-elect of Queens’ College Cambridge. The author of two New York Times bestsellers, he is a senior adviser to Gramercy, professor of practice at the Wharton School (University of Pennsylvania), and senior global fellow of the Lauder Institute.