Down in a Hole
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13 years on from Jackson Hole’s ‘idiot savant’ hubris, many years into a regime of QE that has singularly failed to lift either global growth rates or inflation, and with a rising number of central banks themselves suggesting that monetary policy has done all that it can do, what, if anything, can we expect from Wyoming this year?
• As much-the-same trading sessions come and go, we all have our own individual sign-posts that mark the passage of time: those “is it really that time again already?!” moments that briefly scare us into realizing just how fast the year is rushing by. For me one of these is always the central bank get-together at Jackson Hole in Wyoming, which is held from 25-27 August this year. That’s the case for two reasons. The first is that for many years I genuinely thought that Jackson Hole was called Jackson’s Hole. The second is that this is one of the few times of the year when a major development in central bank thinking can be flagged to the broader public.
• For example, our pre-crisis economic and political norm was dubbed by some as the “Jackson Hole Consensus” in 2003 and comprised: faith in markets; support for central-bank independence; preference for monetary over fiscal policy; emphasis on price stability; and the belief that financial crises were things of the past due to the previous four institutional structures. (What a lot of rubbish that all turned out to be, of course, and one can make a credible case that all those pillars of belief are slowly crumbling.) Moreover, in 2014 Jackson Hole was used by the ECB’s Draghi to float a trial balloon for ECB-QE (sinking EUR/USD); likewise, in 2013 then Fed Chair Bernanke soft-launched QE3 there. So, 13 years on from Jackson Hole’s ‘idiot savant’ hubris, many years into a regime of QE that has singularly failed to lift either global growth rates or inflation, and with a rising number of central banks themselves suggesting that monetary policy has done all that it can do, what, if anything, can we expect from Wyoming this year?
• In the very narrowest terms the focus will be on whether the US can manage to squeeze out one more rate hike this year or not. Fed Vice-Chair Fischer certainly seemed to signal this was the case with his recent comments. Given the Fed Funds futures implied probability is still only 51% for a hike by December this year, that should arguably give a lift to the battered USD if so, and that does seem a likely outcome this week.
• However, on a broader front we need to listen to comments from the BoJ regarding what more it can do when it meets on 21 September: are they done, or is there some further, even more distorting and intrusive step that they can take in the monetary policy field? That argues for a weaker JPY, and also seems quite possible.
• On the broadest front, will there be any official recognition from Jackson Hole that we are likely to never return to the pre-GFC “normal”? And, as a result, that the “consensus” preference for monetary over fiscal policy must now end, as must the strict emphasis on price stability, and, by implication, so will the pre-GFC conception of central-bank independence? (i.e., open policy co-ordination between the two, rather than fiscal loosening and monetary tightening.) True, recent papers/comments from the IMF, the Fed, and the RBA, among others, suggest this view is sinking in. However, it probably won’t get any official recognition at Jackson Hole this year. After all, if it did, suffering tax-payers might not be happy to foot the bill for next year’s very expensive offsite for a bunch of massively-overpaid civil servants who have failed in virtually every key objective they have been set .
• As a slight segueway, soon-to-be ex-RBI governor Rajan was always notably critical of the evident failings of our global economic policy framework; the next RBI governor, Urjit Patel, appears a safe pair of hands, but it remains to be seen if he is willing to make such honest ‘big picture’ assessments.
Week ahead
• Today is a relative snooze-fest, data-wise; tomorrow sees PMI services in Japan and Europe along with a rate decision in Turkey (please see this preview) and US new home sales; Wednesday has US existing home sales; and Thursday the German IFO survey and US durable goods; Friday ends the week with Japanese CPI and Eurozone M3, then a second look at UK and US Q2 GDP.
• Apart from that, if one is not on a beach then one is ‘down in a hole’ – with Yellen’s Friday speech “Designing Resilient Monetary Policy Frameworks for the Future”(!) the one to watch.
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