On Friday, Federal Reserve Chairman Jerome Powell will give his speech at the annual Jackson Hole Symposium in Wyoming.
The widely anticipated event will give hints about upcoming Fed policy.
To help market participants, Powell will need to be clear about when the Fed will stop raising rates, said Gary Wagner, editor at TheGoldForecast.com.
Wagner spoke with David Lin, Anchor and Producer at Kitco News.
“The main thing [market participants] want to understand is at what point will the Federal Reserve stop raising rates… and more importantly, at what point will they start to unwind or, in other words, reduce the Fed Funds rate,” said Wagner.
The Fed has raised its rate by 225 basis points from January to July. The inflation rate in July was 8.5 percent, down from 9.1 percent in June.
Prior to the 2021 Jackson Hole speech, Wagner had forecasted higher inflation going into 2022, when the Fed still had not raised rates.
“If you listen to some of Chairman Powell’s statements, over the past couple of months, he has acknowledged that they should have acted sooner,” he said. “I really do believe that had they started to use their toolbox sooner, we wouldn’t be looking at inflation sitting at 8.5 percent today.”
The Fed’s Forecasting Errors
The Fed failed to forecast inflation accurately, and thus failed policy-wise, said Wagner.
“At the last Jackson Hole symposium… [The Fed] was still under the assumption that inflation would be transitory, that it would work itself out of the system naturally,” he said. “If they had begun 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 has.”
At the same time, Wagner acknowledged that unforeseen events, beyond the Fed’s control, had also caused higher prices. He pointed to the war in Ukraine as a “wild card” that increased oil prices “like a second-stage booster on a rocket.” He also said that food and energy prices, in general, are unlikely to be affected by Fed policy.
Labor Markets
The unemployment rate in July was 3.5 percent, a low rate despite high inflation and supply chain shortages.
However, Wagner predicted that once the job market reaches a new equilibrium, there will be “one job for every two people looking for one,” although he did not see this happening soon.
Other job market indicators also look favorable, with wages and salaries up 5.3 percent from last year.
Some economists are concerned about rising wages during inflationary times, since they claim that higher wages can lead to more inflation, as businesses raise prices to offset greater costs.
Wagner said that although wages were not a “critical” factor in causing inflation, they were “a very important and large piece of the puzzle.”
“We got to where we are because of multiple events occurring,” he said. “And the fact of the matter is that higher wages definitely added to the inflationary pressures we see now.”
To find out Wagner’s forecast for the gold price, watch the video above.
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