What’s the most important fish in central banking? Answer — the trout.
In the early 1980s, the Kansas Federal Reserve was struggling to attract economists to its annual conference when it came up with the idea of hosting it in Jackson Hole, Wyoming, because the prospect of excellent trout fishing might lure then Fed Chairman Paul Volcker (a keen fisherman) to the conference. It worked and, since 1982, the Kansas Fed conference has been held at Jackson, a town of barely more than 9,000 inhabitants.
The Jackson Hole gathering, thanks in no small part to Volcker, is internationally famous and attracts many professional central bankers, many of whose pronouncements are closely followed by markets. Yet, if Volcker were to attend this year’s conference starting on Thursday, he might well look askance at the actions of contemporary central bankers. Volcker was an inflation crusher, a rate-riser (to 20 per cent) and, we can suspect, someone who believed that investors and economies had to bear the consequences of their choices.
He and others may well point out, that the perennial dosing of markets with quantitative easing and its accoutrements (that is, negative rates) is beginning to create risks and imbalances in the financial and political economic systems. He might also point out that whilst inflation is not evident in services prices, it is in asset prices. In such a context, financial markets will pay great attention to the mood and pronouncements emanating from Jackson Hole, where the developed world’s central bankers face several challenges. Political volatility in Washington and price volatility in markets mean investors will be more sensitive to pronouncements from Wyoming.
The primary test will be the extent to which they — notably the Fed, ECB and Bank of England — offer a sense that collectively they are edging towards “the end of accommodation”, in that the decommissioning of central bank balance sheets may now be being planned. If it transpired, a manifestation of a co-ordinated, though gradual, change in central banking mindsets away from quantitative easing, would likely see upward pressure on bond yields and a continued rise in overall market volatility from current low levels. In general, investors would be more keen to protect gains made in the early part of the year and US equities look vulnerable in this light.
If it materialises, such a move by central bankers may also be proof that they are willing to let governments, rather than their own balance sheets, bear political and geopolitical risks. With tensions high in North Korea, trade stresses growing between China and the US, and importantly the debt ceiling debate building in Washington, the stress-tested central banker of the post global financial crisis era might wilt and postpone any form of normalisation till the coast is clear. The Jackson Hole event provides an opportunity for a firmer approach, and one that seeks to have elected officials rather than technocrats bear the burden of policymaking. Choppier markets will test their mettle.
Should central bankers not present an apparently co-ordinated view at Jackson Hole, then the market spotlight may fall unkindly on Mario Draghi. With political risk ebbing in Europe and the ECB having declared an end to deflation in the eurozone, the tendency in the FX market has been for investors to buy euros in the absence of a sanction on euro strength from the ECB. The minutes of the last ECB meeting delivered this but, with the dollar still weak, Mr Draghi and colleagues may well prefer trout fishing in Jackson Lake than being quizzed by the media. If, however, the euro can stabilise at current levels, this will support European equities.
While this year’s symposium offers central bankers a platform to break with the recent past in laying the ground for less generous monetary policy, it may also be a watershed event in the changing of the guard in central banking. At the beginning of next year, it is likely that the Federal Reserve will have a new chair.
Whomever this will be, they may have to acknowledge the role of a more rules-bound approach to monetary policy as the political price of their appointment. Then, with an eye on the agenda of future Jackson Hole symposia, the next generation of central bankers will have to grapple with issues such as the emergence of cryptocurrencies, the consequences of China’s attempts to pare down its debt burden and the structural effects on inflation of changing real estate and labour markets. With such a rich set of problems ahead, even fishing loses its draw.
Michael O’Sullivan is chief investment officer in the international wealth management division at Credit Suisse
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