Chair Jerome H. Powell

Thank you for the opportunity to speak here today.

At past Jackson Hole conferences, I have discussed broad topics such as the ever-changing structure of the economy and the challenges of conducting monetary policy under high uncertainty. Today, my remarks will be shorter, my focus narrower, and my message more direct.

The Federal Open Market Committee's (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all. The burdens of high inflation fall heaviest on those who are least able to bear them.

Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

The U.S. economy is clearly slowing from the historically high growth rates of 2021, which reflected the reopening of the economy following the pandemic recession. While the latest economic data have been mixed, in my view our economy continues to show strong underlying momentum. The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers. Inflation is running well above 2 percent, and high inflation has continued to spread through the economy. While the lower inflation readings for July are welcome, a single month's improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down.

We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent. At our most recent meeting in July, the FOMC raised the target range for the federal funds rate to 2.25 to 2.5 percent, which is in the Summary of Economic Projection's (SEP) range of estimates of where the federal funds rate is projected to settle in the longer run. In current circumstances, with inflation running far above 2 percent and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause.

July's increase in the target range was the second 75 basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting. We are now about halfway through the intermeeting period. Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook. At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.

Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy. Committee participants' most recent individual projections from the June SEP showed the median federal funds rate running slightly below 4 percent through the end of 2023. Participants will update their projections at the September meeting.

Our monetary policy deliberations and decisions build on what we have learned about inflation dynamics both from the high and volatile inflation of the 1970s and 1980s, and from the low and stable inflation of the past quarter-century. In particular, we are drawing on three important lessons.

The first lesson is that central banks can and should take responsibility for delivering low and stable inflation. It may seem strange now that central bankers and others once needed convincing on these two fronts, but as former Chairman Ben Bernanke has shown, both propositions were widely questioned during the Great Inflation period.1 Today, we regard these questions as settled. Our responsibility to deliver price stability is unconditional. It is true that the current high inflation is a global phenomenon, and that many economies around the world face inflation as high or higher than seen here in the United States. It is also true, in my view, that the current high inflation in the United States is the product of strong demand and constrained supply, and that the Fed's tools work principally on aggregate demand. None of this diminishes the Federal Reserve's responsibility to carry out our assigned task of achieving price stability. There is clearly a job to do in moderating demand to better align with supply. We are committed to doing that job.

The second lesson is that the public's expectations about future inflation can play an important role in setting the path of inflation over time. Today, by many measures, longer-term inflation expectations appear to remain well anchored. That is broadly true of surveys of households, businesses, and forecasters, and of market-based measures as well. But that is not grounds for complacency, with inflation having run well above our goal for some time.

If the public expects that inflation will remain low and stable over time, then, absent major shocks, it likely will. Unfortunately, the same is true of expectations of high and volatile inflation. During the 1970s, as inflation climbed, the anticipation of high inflation became entrenched in the economic decisionmaking of households and businesses. The more inflation rose, the more people came to expect it to remain high, and they built that belief into wage and pricing decisions. As former Chairman Paul Volcker put it at the height of the Great Inflation in 1979, "Inflation feeds in part on itself, so part of the job of returning to a more stable and more productive economy must be to break the grip of inflationary expectations."2

One useful insight into how actual inflation may affect expectations about its future path is based in the concept of "rational inattention."3 When inflation is persistently high, households and businesses must pay close attention and incorporate inflation into their economic decisions. When inflation is low and stable, they are freer to focus their attention elsewhere. Former Chairman Alan Greenspan put it this way: "For all practical purposes, price stability means that expected changes in the average price level are small enough and gradual enough that they do not materially enter business and household financial decisions."4

Of course, inflation has just about everyone's attention right now, which highlights a particular risk today: The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.

That brings me to the third lesson, which is that we must keep at it until the job is done. History shows that the employment costs of bringing down inflation are likely to increase with delay, as high inflation becomes more entrenched in wage and price setting. The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.

These lessons are guiding us as we use our tools to bring inflation down. We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.

1. See Ben Bernanke (2004), "The Great Moderation," speech delivered at the meetings of the Eastern Economic Association, Washington, February 20; Ben Bernanke (2022), "Inflation Isn't Going to Bring Back the 1970s," New York Times, June 14. Return to text

2. See Paul A. Volcker (1979), "Statement before the Joint Economic Committee of the U.S. Congress, October 17, 1979," Federal Reserve Bulletin, vol. 65 (November), p. 888. Return to text

3. A review of the applications of rational inattention in monetary economics appears in Christopher A. Sims (2010), "Rational Inattention and Monetary Economics," in Benjamin M. Friedman and Michael Woodford, eds., Handbook of Monetary Economics, vol. 3 (Amsterdam: North-Holland), pp. 155–81. Return to text

4. See Alan Greenspan (1989), "Statement before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, February 21, 1989," Federal Reserve Bulletin, vol. 75 (April), pp. 274–75. Return to text

Last Update: August 26, 2022

"Be the chief but never the lord." Lao Tzu

Tổng cục thống kê (TCTK) công bố số liệu kinh tế tháng 8 với các kết quả vĩ mô chính đều cho thấy sự phục hồi, trong khi lạm phát tiếp tục được kiểm soát:

•            Chỉ số sản xuất (IIP) toàn ngành công nghiệp trong tháng 8 tăng 2,9% so với tháng trước (MoM) và 15,6% so với cùng kỳ (YoY), giúp IIP 8 tháng 2022 tăng 9,4% YoY. Lĩnh vực sản xuất, chế biến, chế tạo tiếp tục đóng vai trò là động lực tăng trưởng chính với mức tăng 16,2% YoY trong tháng 8 và 10,4% YoY trong 8T 2022.

•            Tổng mức bán lẻ hàng hóa và dịch vụ tháng 8 tăng 0,6% MoM và tăng mạnh 50,2% YoY trên mức cơ sở thấp của tháng 8/2021. Tính chung 8T 2022, tổng mức bán lẻ tăng 19,3% YoY, nếu loại trừ yếu tố giá tăng 15,1% YoY, trong khi cùng 8T 2021 giảm lần lượt 3,5% và 5,1%.

•            Kim ngạch xuất khẩu tháng 8 tăng 9,1% MoM và 22,1% YoY lên 22,4 tỷ USD, trong khi nhập khẩu tăng 1,4% MoM và 12,4% YoY, đạt 31 tỷ USD, dẫn dến xuất siêu 2,42 tỷ USD. Tính chung 8T 2022, tổng kim ngạch xuất nhập khẩu lần lượt đạt 250,8 tỷ USD (+17,3% YoY) và 246,8 tỷ USD (+13,6% YoY), xuất siêu 3,96 tỷ USD, trong khi 8T 2021 nhập siêu 3,52 tỷ USD.

•            Giải ngân vốn đầu tư FDI tăng 10,5% YoY, đạt 12,8 tỷ USD, mặc dù FDI đăng ký giảm 12,3% YoY, đạt 16,8 tỷ USD.

•            Chỉ số giá tiêu dùng (CPI) tháng 8 tăng 2,89% YoY và gần như không đổi so với tháng 7. Giá cả một số hàng hóa, dịch vụ thiết yếu và học phí tăng trước mùa khai giảng năm học mới được trung hòa bởi giá xăng dầu bán lẻ thấp hơn trong tháng 8. Lạm phát bình quân 8T 2022 tiếp tục duy trì ở mức thấp, tăng 2,58% YoY.

VCSC Research

"Because of a great love, one is courageous." Lao Tzu

"An ant on the move does more than a dozing ox." Lao Tzu

The Vietnamese market still looks an attractive destination for investment despite the risks hovering around the wider region. International investors in Asia-Pacific and emerging markets in general have  been put on high alert after widespread civil unrest in Sri Lanka which culminated in the resignation of the president and prime minister. The island nation has faced months of protests about the state of the economy, and on top of spiralling food and fuel prices it is struggling with a huge interest bill on its foreign-currency debt. Unfortunately, Sri Lanka isn’t the only Asian country facing economic hardship and potentially a recession according to a survey of leading economists.

RISKS RISING

The latest poll by Bloomberg suggests while Sri Lanka has an 85% chance of falling into recession in the next year, up from a 33% chance in the previous survey, economists have also raised their expectations of recession across the region.

China and Taiwan have a one in five chance of entering recession in the next 12 months, as does Australia, while Japan and Korea have a one in four chance and New Zealand’s chances are one in three according to the survey. In fairness, Bloomberg Economics’ proprietary model gives the US a 38% chance of falling into recession in the next 12 months, compared with zero chance at the start of the year.

However, unlike the US, what is compounding investor worries about Asian economies is their high external debt levels and the risk of default.

MOUNTAIN OF DEBT

Emerging economies around the world could be on the precipice, according to Bloomberg, with  a pile of close to $240 billion of distressed debt ‘threatening to drag the developing world into an historic cascade of defaults’. Lebanon stopped paying foreign bondholders for the first time in March 2020, followed by Sri Lanka this May and Russia last month.

The cost of insuring emerging market debt against non-payment has rocketed since Russia invaded Ukraine, with Egypt, Ghana, Pakistan and Tunisia all seen all vulnerable to default. Even countries like Argentina, which has an estimated 74% ratio of government debt to GDP (gross domestic product) and whose sovereign bonds yield close to 21%, could be drawn into the downward spiral. ‘With low-income countries, debt risks and debt crises aren’t hypothetical. We’re pretty much already there’, said World Bank chief economist Carmen Reinhart on Bloomberg TV.

Of the $1.4 trillion of outstanding emerging market sovereign debt priced in dollars, euros or yen, around a fifth is trading at ‘in distress’, which means they are yielding more than 10% above US Treasuries with similar maturities, indicating potential default.

The concern among economists is that there could be ‘contagion’ or a domino effect if foreign bondholders decide to pull the plug, as has happened in previous crises. Markets which on the face of it have no connection with each other could start to topple simply because investors start taking money out with no warning, as happened during the Asian crisis of the late 1990s and the Latin American debt crisis of the 1980s.

The current crisis is reminiscent of the 1980s, as rapid interest rate rises by the Federal Reserve to curb inflation are forcing the dollar higher, adding to the pain for developing countries already struggling to service their foreign debt. Many emerging economies rushed to sell foreign-denominated bonds during the Covid pandemic when interest rates were rock bottom and their borrowing needs were high, but with central banks in the US and Europe raising rates capital is draining out of these markets again.

Now, with food and energy prices soaring and the threat of more political turmoil, some countries may decide, somewhat understandably, that what little reserves they have would be better  off spent helping their own citizens rather than repaying foreign bondholders.

NOTABLE EXCEPTION

One country which isn’t on the list of potential defaulters and has just a 10% risk of entering recession in the next 12 months, according to Bloomberg, is Vietnam. A so-called ‘edge’ market, because it borders China, Vietnam has a growth record most nations would be proud of, a low debt to GDP ratio and plenty of foreign currency reserves.

GDP rose by 7.7% in the second quarter, the strongest April-June increase since 2011, bringing first half growth to 6.4% and leading international economists to raise their full-year estimates. Industrial production for the first half rose by 8.5%, while exports increased by 17.3% to $186 billion creating a small trade surplus.

Meanwhile, the ratio of sovereign debt to GDP is just over 40%, lower than China (78%) and South Korea (52%), as the government resisted splurging on welfare and social spending during the pandemic unlike other Asian countries.

Having been badly affected during the global financial crisis, fiscal discipline and monetary stability are now ingrained. Vietnam is also one of the few countries worldwide to enjoy positive real interest rates, as inflation is just 3.4%, although rising oil costs are pushing items such as transportation up by double digits.

Crucially, food price inflation isn’t an issue as the country is largely self-sufficient in basic foodstuffs such as rice, grains and fish, and it is a major exporter of agricultural products to the US, China and Japan. Another positive for the nation is that, due to the breakdown in global supply chains following the sudden demand surge post-pandemic, there has been a record increase in foreign direct investment this year.

Among others, US tech giant Apple (AAPL:NASDAQ) is relocating iPad manufacturing from China to Vietnam while Chinese smartphone maker Xioami has opened a new plant in the country. As a result of its economic growth and success in attracting foreign investment, S&P Global Ratings upgraded Vietnam’s long-term sovereign credit rating in May from BB to BB+ with a stable outlook, one notch below investment grade.

VALUE OPPORTUNITY

Despite its strong economic performance, however, the Vietnamese stock market has been a victim of the unwinding of global risk positions with the Ho Chi Minh stock index down nearly 22% year to date. Dien Vu, manager of UK-listed investment trust Vietnam Enterprise Investments Limited (VEIL), argues the biggest stocks in the market are growing their profits by more than 20% this year, putting the index at a five-year valuation low of nine times prospective earnings.

On the one hand it’s reasonable to expect economic growth to moderate in the second half, while inflation could continue to creep up. However, with oil making up more than half of the increase in inflation the recent fall in crude as a result of demand destruction in markets like the US should be enough to offset rising material input prices.

There could also be a major catalyst for the market down the road when the global index compilers like MSCI and S&P finally put Vietnam on their emerging markets ‘watch list’. There are a couple of reasons why the country doesn’t yet feature in the emerging markets indices, the main one being the market isn’t open to foreign investors.

The simple reason for this is the government doesn’t want its much larger northern neighbor piling in and buying up large swathes of the economy. The regulator is in the process of allowing Vietnamese companies to issue non-voting depository receipts, or NVDRs, which will have the same dividends and rights as ordinary shares without a vote.

Vietnam’s prime minister is pushing hard to allow foreign investment in the market, which will go a long way to getting the country on the ‘watch list’. Once the country officially joins the emerging market indices, there will be a huge inflow of money as big global investors scramble for a piece of the pie.

BEAT THE CROWD

For UK investors, there are already a couple of ways to invest in Vietnam through London-listed, country-specific investment trusts which are all trading at a discount to net asset value, meaning they offer a ‘double discount’ to the market’s usual valuation.

The largest is Vietnam Enterprise Investments, which has £1.6 billion of assets and trades at a 20% discount to net asset value with an ongoing charge of 1.89%. This is followed by Vietnam Opportunity Fund (VOF) with £980 million of assets, also trading at a 20% discount and with an ongoing charge of 1.64%, and Vietnam Holding (VNH) with £104 million of assets, trading at a 16% discount with an ongoing charge of 2.52%.

DISCLAIMER: The author owns shares in Vietnam Enterprise Investments Limited.

By Ian Conway Companies Editor