The Jackson Hole central bank's annual meeting will debate the neutral interest rate, and Powell's message will be seen as dovish

Markets have two big questions to answer - how high will US interest rates rise, and for how long?

Attending the central bank's annual meeting in Jackson Hole, Wyoming, on August 25, Federal Reserve Chairperson Jerome Powell's participation in discussions on the real neutral interest rate may provide some important clues.

Anna Wong of Bloomberg Economics said that given the divergent views on the issue within the Fed, "we expect Powell to promote his preferred risk management strategy - moving slowly". To better assess any estimate of the neutral rate, the FOMC will need to wait and see - possibly with a few meetings.This delicate message could be seen as dovish in Powell's speech on Friday。

Here's what Bloomberg economists like Anna Wong expect from Jackson Hole:

The macroeconomic backdrop theme for this year's Jackson Hole symposium was "Structural changes in the global economy", which is very different from the situation in 2022. Inflation has fallen sharply, and it is now the general consensus that the economy has achieved a soft landing.

Correspondingly, Powell's center of gravity has shifted. In stark contrast to last summer's speech,His speech this Friday is likely to emphasize patienceAnd last summer he adopted a do-whatever-it-takes approach to keeping inflation down, in the spirit of former Federal Reserve chairperson Paul Volcker. In doing so, he may invoke former Fed chairperson Alan Greenspan, one of the few central bankers to have managed a soft landing.

At the 2018 conference, Powell said that the key reason for Greenspan's success was his wait-and-see risk management strategy, which, in summary, was"Let's wait until the next meeting; if there are more obvious signs of inflation, we will start tightening policy."。

With disagreement within the Fed over the level and path of the real neutral interest rate, or r *, the rate consistent with full employment and the Fed's 2 per cent inflation target, Mr. Powell is likely to pursue this strategy now.

Estimates of the short-term neutral interest rate help determine whether monetary policy is sufficiently restrictive.Within the Federal Reserve, estimates of the neutral interest rate range widely.

Models from the Richmond Fed and the New York Fed estimate the short-term real neutral rate at around 2%. Estimates from New York Fed President William Williams (second only to Powell among FOMC participants) and other models from the New York Fed and the Dallas Fed suggest a range of just below zero to just below 1%.

If the higher end of the estimate range is used, the nominal interest rate at the end of the year may be 5.1%, and the policy is still restrictive. If the William estimate is used, the resulting end point interest rate is 5.5%, which is quite restrictive.

Industrial foreign exchangeEconomists' judgment of the short-term real neutral rate helps gauge how restrictive policy is, but it does little to predict the level of interest rates six months or a year from now, because the short-term neutral rate can be quite cyclical, falling sharply during a recession.

The concept of a less volatile long-term neutral rate is even more important for forecasting the path of the federal funds rate beyond 2023.Likewise, the range of estimates for the long-term neutral interest rate is also very broad.

Williams believes the epidemic has yet to reverse the decline in r *, even describing his findings as "robust relative to a range of other model norms".Williams uses blue-chip economic indicators to predict that r * will turn negative in 2024. If the FOMC adopts his view, a significant rate cut could be expected next year.

The disagreement over r * may mean that Powell will not tilt himself in favor of either camp.However, from the perspective of Williams' position as vice chairperson of the FOMC, the likelihood that Powell agrees with his views may increase.

Beyond the rational debate about r *, what will finally quell the debate about whether interest rates are restrictive enough is how the economy will perform in the future. If the economy remains strong throughout next year, r * may indeed be higher.

If the long and variable lagging effects of previous rate hikes continue through the end of the year, the moment Bloomberg Economics predicts the economy is in recession, the argument that the neutral rate is on the low side could gain traction.

Overall, the annual Jackson Hole Central Bank Annual Meeting willSparking a lot of discussion about the real neutral interest rateGiven the uncertainty surrounding these estimates, the Federal Reserve chairpersonPowell may return to his preferred incremental strategyAnd hinted that the FOMC is willing to keep policy unchanged at several meetings without necessarily ending the rate hike cycle.The dovish talk will highlight the possibility that the neutral rate has not yet risen, and may even fall, implying a significant rate cut in 2024.In light of our forecast for a weak U.S. economy through the end of the year, we expect the FOMC to maintain interest rates unchanged for the remainder of 2023.