Two years in, the job before central bankers remains daunting. For over a decade, the dominant aim was straightforward: curb inflation toward a two percent target that would support healthy growth. Yet a 2021 inflation shock lingered, stubbornly resisting the hoped-for return to target levels. Price gains have eased but stay well above the ideal mark. The dilemma now is how long policy should stay restrictive. Should rate hikes continue, even marginally, knowing they raise the risk of a sharper recession, or stay the course with a hold that might leave inflation stubbornly high?
This issue is expected to be a central topic at the 46th annual gathering in Jackson Hole, Wyoming, where central bankers from around the world convene. The week will spotlight remarks from the U.S. Federal Reserve chair and the European Central Bank president on Friday afternoon, with investors watching closely for signals about future policy paths. After a strong run through July, global equity markets dipped in August, roughly tracking a broad retreat as participants await guidance on policy direction and its implications for growth and risk.
Since March 2022, the Federal Reserve has lifted the price of money by over five percentage points, pushing the policy range to its highest in more than two decades. The chair hinted at the possibility of another move or a pause at the upcoming September meeting, underscoring that inflation remains elevated and that monetary restraint may be needed for a while. The message was clear: policy will stay restrictive until inflation clearly cools, but the timing of further steps remains uncertain.
What is the Jackson Hole Annual Meeting and why is it important?
durable economy
The United States has seen a notable easing in headline inflation from its peak in mid-2022, though some momentum has reappeared recently. Energy and food costs have been more volatile, while underlying inflation has shown signs of slowing. The economy posted modest growth in the first half of the year, and unemployment has remained historically low, suggesting resilience even as policymakers weigh the next move.
There remains room for policy to tighten again if needed. Any further reduction in inflation would require time for previous rate actions to ripple through the economy. Analysts suggest the baseline scenario points to a potential slowdown or shallow recession toward year-end, with a pause after a rate increase possibly followed by another move if inflation proves stubborn. Market watchers wonder when policy can ease without reigniting inflation.
The euro area faces a more challenging mix, with inflation persisting even as activity slows. Although headline inflation has cooled from its peak, core pressures remain elevated. Growth has cooled, and unemployment, while historically low, remains higher than in the United States.
Worst-case scenario for the ECB
The combination of persistent inflation and a softer economy complicates the outlook for the ECB more than for the Fed. Analysts note a rare divergence: inflation appears to ease in the United States alongside weakening real activity, while uncertainty in the Eurozone points to continued inflation pressures with uneven growth. The market has priced in more tightening for Europe relative to the United States, which raises the risk of a hard landing in the euro area.
ECB actions in recent months have centered on maintaining restrictive rates for longer, with policymakers signaling readiness to act again if needed. The emphasis is on keeping rates at levels that restrain demand until price growth continues to slow, while balancing the risk of harming the economy more than necessary. The key question remains: how long can central banks depress activity to reduce inflation without causing lasting damage to growth?