Outlook for this year’s bankers meeting in Jackson Hole
25 AUG, 2023
From today until next Saturday, August 26th, one of the most prominent events of the year in the financial field is taking place: the conference in Jackson Hole (USA), which brings together not only central bank officials but also academics, ministers, and some executives and entrepreneurs. This is what will happen during this year's Economic Symposium of the Federal Reserve Bank of Kansas City, according to experts' analyses.
James McCann, Deputy Chief Economist at abrdn
Those who were expecting clear signals about the direction of short-term monetary policy from Federal Reserve Chair Powell at this year's Jackson Hole meeting might find themselves disappointed. During the July meeting of the Federal Open Market Committee (FOMC), Powell made it clear that, going forward, monetary policy decisions will be data-dependent as the central bank observes how the tightening it has carried out so far is impacting domestic growth and inflation.
Considering that there are still several significant data releases pending before the September meeting, it would be unusual for the Chair of the Federal Reserve to clearly signal a direction before this meeting. Instead, it is expected that Powell will emphasize that all upcoming meetings are important and that the FOMC is prepared to further tighten monetary policy if necessary.
The theme of this year's meeting is 'Structural Changes in the Global Economy,' which could open the door to a debate about the extent to which neutral interest rates may have shifted higher after the pandemic. Powell has consistently been skeptical about using uncertain estimates of neutral interest rates to calibrate policy. In fact, he might use this as an opportunity to reiterate the benefit of letting the flow of data inform the Fed about how restrictive the policy is becoming.
Lastly, there has been recent speculation about the possibility of the Fed allowing inflation to drift more slowly towards the target to help ensure a smooth landing, or even changing its inflation target to accommodate higher inflation. However, Powell has insisted that this would be a poor time to raise inflation targets as it could undermine confidence in the central bank's commitment to any future target and warned about the significant costs of allowing above-target inflation to take hold. Therefore, fireworks on this front are not expected.
Mondher Bettaieb-Loriot, Director of Corporate Debt at Vontobel
At this year's symposium, we believe that Federal Reserve Chair Jerome Powell will emphasize that the current policy of the central bank is sufficiently restrictive to steer inflation back to its 2% target. In fact, as U.S. inflation continues to decline, the nominal federal funds rate becomes even more constraining for the American economy.
Both Powell and Williams, President of the New York Fed, have recently indicated that they may need to adjust rates downward to keep real interest rates at least steady, aiming to maintain a desired maximum level of restrictiveness. Thus, we could be moving towards a prolonged restrictive stance, where the central bank would implement rate cuts starting from 2024 as inflation continues to decelerate, until the economy returns to a core inflation of 2%. Once that level is achieved, the possibility of returning real rates to a neutral level could be considered, as suggested by Williams, the President of the New York Fed.
On the other hand, the recent volatility in the U.S. Treasury market, which has driven yields higher, has been due to an increase in redemptions and bond supply during a liquidity-scarce summer period. Factors driving yields higher also include the U.S. credit rating downgrade by Fitch and the yield curve control adjustment by the Bank of Japan. None of this changes my conviction that we should see much lower yields by the end of June 2024, unless core inflation stops falling concurrently with GDP materially shifting upward from the Fed's current projection of 1-1.5% growth in 2024. These changes would need to occur in conjunction.
Enguerrand Artaz, fund manager at La Financière de l’Echiquier.
Last year's Jackson Hole symposium marked a significant turning point in market dynamics. As markets were buoyed with renewed optimism, expecting the Fed to become less restrictive, Jerome Powell dashed those hopes. He sent equity markets into a downward spiral and interest rates to new highs. Can we anticipate a repetition of this scenario?
There are certain similarities with 2022. Markets are buoyed by a wave of optimism, combining hopes for a soft landing of the economy with the imminent end of rate hikes. However, the situation has changed dramatically. While the absolute level of inflation remains high, it is on a downward trajectory and prospects for the coming months are promising. The Fed has also started to consider the balance between the risk of not doing enough and the risk of overdoing it. Therefore, it's unlikely that Powell will be as hawkish as last year. Nonetheless, we also don't believe the Fed Chair will lay the groundwork for a sharp policy U-turn, let alone a return to accommodation. His speech is likely to focus on the need to maintain high interest rates for an extended period and the imperative of further balance sheet reduction (quantitative tightening). This would hold true even if rates were to be marginally lowered later on. This latter point, drawn from the minutes of the Fed's July meeting, is both novel and a puzzle: it involves potentially accommodative interest rate policy while constraining the balance sheet size. A curious mechanism that, in our view, could well be the centerpiece of the pedagogical exercise Jerome Powell is about to undertake.
Jack Janasiewicz, Portfolio Manager and Strategist at Natixis Investment Managers
The purpose of the symposium, as stated by the KC Fed, is "to convene presenters and discussants to examine important issues, implications and policy options facing the United States and world economies."
The list of invitees includes central bankers, finance ministers, academic professionals and financial market participants from around the world. The meeting comes at a time when inflation is still running higher than target all the while employment remains strong and the economy resilient.
Last year saw Fed Chairman Jay Powell rip up his original script and use his Jackson Hole speech to warn of ‘pain ahead’ regarding the battle against inflation, noting in a short and pointed message that higher interest rates, slower growth and softer labour market conditions would be needed to bring down inflation. Against this backdrop, households and businesses would likely face some pain along the way, an unfortunate cost of reducing inflation.
This year’s theme? "Structural Shifts in the Global Economy." We’ve heard many guesses as to the topic that will be presented by Chair Powell given that the markets will be intently listening to every word. Much has been made over the proverbial ‘r-star” or the real neutral rate of interest that equilibrates the economy in the long run. Might Powell use his time to push the notion that r-star is higher than previously thought?
In past speeches, Powell has indicated that he has never been a fan of the concept given that it is more a theoretical exercise rather than a measurable data point. And given the relentless harping that the Fed needs to remain flexible and data dependent, such a shift would run contrary. We’ve also heard calls for moving the inflation target higher, say from 2% to 3%. While we have some sympathy for such calls – what makes a 2% inflation target so special anyway – such a move right now would certainly raise a few eyebrows with the critics questioning the Fed’s inflation fighting credibility (which has been under fire from the critics for quite some time already). Or maybe his commentary will be as simple as highlighting a higher for longer mantra.
The Fed faces a dilemma right now as it continues its push towards a 2% target. Getting to a 3% handle was pretty straight forward. But that last push to get to 2% might require some significant trade-offs – one that requires a possible recession in order to bring inflation down to target. Remember that the Fed is unique in that it has a dual mandate – full employment and stable prices. How willing will the Fed be to push the economy into a recession in order to achieve that target? Is it willing to trade sharp job losses for an inflation rate of 2%? Or can it sit tight and use higher for longer to slowly get inflation back down while minimizing the damage to the overall economy and jobs? That sounds a whole lot like the Flexible Average Inflation Targeting framework that was unveiled just 3 years ago at this very venue. When it’s all said and done, don’t expect any big surprises to be unveiled at Jackson Hole.
And don’t expect any specific previews for the September FOMC meeting. We have the jobs report and CPI before the next meeting – more data points. No need to box themselves into a corner. Do expect Chair Powell to stress what he has stressed all along: data dependency, flexibility, progress is being made but there is still some work to be done so expect higher for longer. Right down the middle.
