Morgan Stanley: This Is What Powell Will Be Looking At Before He Delivers His Jackson Hole Speech

By Seth Carpenter, Morgan Stanley chief economist

All attention this week will be on Jackson Hole, where the conference has been aptly titled “Reassessing the Effectiveness and Transmission of Monetary Policy.” We expect Chair Powell to hold forth on the medium-term strategy for the Fed, particularly the fact that sustained disinflation means that it can focus on sustaining the expansion while still getting back to the 2% target. The FOMC has signaled the start of cutting, but Powell will likely note that even after cutting, policy will still be tight. Indeed, distinguishing between levels and changes may well be a theme. Economic activity is slowing, but it is not particularly weak. The job market has cooled, but even the 115k for July is not especially soft. Markets will have to decide what matters more – the level or the trend.

The 0.8pp rise in the unemployment rate from its low is another level versus trend debate. Much has been made of the historical relationship that an increasing unemployment rate presages a recession. But I have written previously about how very different this cycle’s labor market is from the past. Rising unemployment has historically been a harbinger of recession because it signals job loss in addition to a fall in labor demand. This cycle, demand for labor has definitely slowed from an unsustainable pace, but firings have remained quite low. Moreover, the signal from the unemployment rate in past cycles has been muted because labor supply also falls in a downturn. This time around, the unemployment rate rise is amplified because of labor supply. Put differently, 4.3% unemployment is still a low level, and the upward trend carries much less signal than in the past.