Central bankers, Federal Reserve officials, policymakers and academics have descended on Jackson Hole, Wyoming, as the Federal Reserve Bank of Kansas City’s 46th annual Economic Policy Symposium kicks off today. Keep track here with our daily digest of news, insights and developments as policymakers debate their macroeconomic path for the coming year.
Hosted at the Jackson Lake Lodge at Grand Teton National Park, Wyoming since 1982, the symposium will focus on the theme will focus on the theme “Structural Shifts in the Global Economy”, interrogating global economic developments in the wake of the Covid-19 pandemic and the impact it has had on economies, trade networks, monetary policy, sovereign debt and global financial flows.
Navigating by the stars under cloudy skies
Fed Reserve chair Jerome ‘Jay’ Powell kicked off the Jackson Hole symposium with a speech that was cautiously optimistic but, Powell warned, with inflation still high, the Fed cannot begin to unwind its “tight monetary policy” just yet.
While inflation has peaked, “it remains too high”, Powell said, opening his speech with the headline issue. “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective [of 2%].”
Powell said by the time the Federal Open Market Committee (FOMC) raised the policy rate in March 2022, it was clear that tackling inflation would require both the unwinding of pandemic-era demand and supply distortions, and a tightening of monetary policy, which would slow the growth of aggregate demand and allow supply time to catch up. “While these two forces are now working together to bring down inflation, the process still has a long way to go,” Powell said.
On a 12 month basis, core PCE inflation peaked at 5.4% in February 2022 and declined gradually to 4.3% in July.
While the lower monthly readings for core inflation in June and July were welcome, Powell said, “two months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal”.
“Turning to the path forward, 2% is and will remain our inflation target. We are committed to achieving and sustaining a stance of monetary policy that is sufficiently restrictive, to bring inflation down to that level over time,” Powell said.
Since the symposium a year ago, the FOMC has raised the policy rate by 300 basis points, including 100 basis points over the past seven months and the Fed has “substantially reduced” the size of its securities holdings.
And beyond the traditional sources of policy uncertainty, the supply and demand dislocations unique to this particular cycle raises further complications through their effects on inflation and labour market dynamics.
In addition, there is evidence, Powell suggested, that inflation has become more responsive to labour market tightness than was the case in recent decades.
“These changing dynamics may or may not persist and this uncertainty underscores the need for agile policymaking. These uncertainties, both old and new, complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little,” Powell said.
“As is often the case, we are navigating by the stars under cloudy skies. In such circumstances, risk management considerations are critical.”
Powell concluded by saying that in upcoming meetings the FOMC will assess its progress based on the totality of the data, the evolving outlook and risks, and based on these assessments will decide whether to tighten further or instead to hold the policy rate constant and await further data.
“Restoring price stability is essential to achieving both sides of our dual mandate. We will need price stability to achieve a sustained period of strong labour market conditions that benefit all and we will keep at it until the job is done.”
H1 2023 global markets hit by ‘geopolitical turmoil’, says WFE
New data released by the World Federation of Exchanges (WFE) shows that the economic and geopolitical turmoil of H1 2023 has hampered economic growth and hit trading activity.
The war in Ukraine, bank failures in Europe and the US and stubborn inflation, which has forced central banks to tighten monetary policy through interest rate rises, have put pressure on share prices, the group said.
WFE CEO Nandini Sukumar said: “The first half of the year has been tough for markets and International Monetary Fund (IMF) expectations for global growth project a slow recovery.
“As we enter the second half of the year eyes will be on the direction of inflation. A decline in inflationary pressures coupled with a decrease in monetary policy tightening would lessen the trends we saw in the first half as we would anticipate more confidence in markets.”
Compared to H1 2022, in H1 2023 the value of shares traded and traded volumes globally decreased 20.9% and 13.9%, respectively, with decreases observed across all regions.
While trading activity in cash equities decreased in H1 2023 against H1 2022, there was an increase in volumes of exchange-traded derivatives, especially in interest rate and commodity contracts, which WFE attributed to the desire to manage the risks and uncertainty derived from interest rate hikes, the geopolitical landscape and inflation. The WFE said the decline in trading activity reflected less interest in participating in the markets.
WFE data for H1 2023 shows a decrease in the global number of initial public offerings (IPOs) (down 28.9%) and in investment flows compared to H1 2022, with the US an outlier offering a positive trend for these indicators.
Pedro Gurrola-Perez, head of research at WFE, said: “Our new data indicates a slower economic recovery than was expected as geopolitical and economic tensions have taken their toll. The decrease in the number of IPOs and in investment flows, in particular, suggests the persistence of the uncertainty that firms and investors faced in the previous year.”
“Higher for longer”
The ‘higher for longer’ question is expected to be the central pillar of proceedings today. Federal Reserve Bank of Richmond president Thomas Barkin said: “If inflation remains high and demand gives no signal it is likely to drop, that would require tighter monetary policy. Consumer spending, economic strength make it possible the US economy could reaccelerate before inflation cools.”
Chairman Jerome Hayden “Jay” Powell is set to speak on Friday, and his comments will set the tone and direction of the US central bank’s monetary policy as it tries to fight inflation. His words may also impact US Treasury yields, which have driven the rise in the dollar in recent weeks.
Foreign dignitaries arrive
Among the number of central bankers jetting into Wyoming is Bank of Japan (BOJ) governor Kazuo Ueda, the country’s central bank said on Wednesday. The European Central Bank’s (ECB) Christine Lagarde is also expected to attend.
With the ECB also waging a war on inflation, there are murmurs Lagarde’s speech might move the markets more than headliner Powell’s. Karl Schamotta, chief market strategist at Corpay in Toronto, said: “If Powell stays on the theoretical side of things, that might lower implied volatility of the dollar and lead to a smaller reaction.”
Either way, Goldman Sachs is reportedly not expecting a lot from Powell, suggesting any indicators will most likely be held back until after the July PCE inflation and the nonfarm payrolls report that follow next week, Admiral Markets reports.
Uncertainty is impacting equities, says Liquidnet
Liquidnet’s head of market structure for the Americas, Jeffrey O’Connor, said traders – returning from their summer vacays – will be paying close attention to Federal Reserve chairman Powell’s comments as they get to grips with the long-term implications of stubbornly high rates and the effect this will have on the performance of equities.
“The uncertainty and concern triggered by our new economic reality has created choppy conditions with regard to equities volumes. We have seen the S&P 500 dip below a key strategic level and a muted response despite a reasonable set of Q2 earnings, as markets seek the path of least resistance and question marks remain over the fate of the economy.
“Jackson Hole will set the tone for the rest of the year. Many expect higher rates for longer – whatever signals Powell gives, they will act as traders’ starting gun and will likely usher a lively period of trading throughout September,” O’Connor said.
Choppy dollar as market awaits feedback
With expectations that central banks could keep rates higher for longer, the dollar inched lower against a basket of its peers on Monday, ending a five-week winning streak.
The dollar index, which measures the currency against six other currencies, fell 0.077% and was last seen at 103.290, moving away from Friday’s two-month high of 103.68. Benchmark 10-year yields rocketed to a 15-year high on Monday and were last up 8.9 basis points at 4.339%.
Markets in the US opened mostly higher on Monday before diving ahead of the Jackson Hole meeting of central bankers. The S&P 500 was down 0.1%, the Dow was 0.6% lower and the Nasdaq rose 0.4%.
“While the Nasdaq 100 has led the move higher, today’s rebound is running into trouble due to rising US yields which have pulled the market off the highs of the day,” said Michael Hewson, chief market analyst at CMC Markets in a Reuters report.
However, come Tuesday, the US dollar index was up 0.2% at 103.57, nearing a two-month peak touched last week.
The index was sitting just shy of the two-month high of 103.68, reached last week as worries over China’s economy and bets US interest rates will stay high lifted the dollar.
“Powell’s appearance will be watched very closely,” Helen Given, FX trader at Monex USA in Washington, told Reuters. “I don’t see any huge moves for USD before the symposium; no one wants to get caught on the wrong side of the market.”
Traders have also been paying attention to the BRICS (Brazil, Russia, India, China and South Africa) summit in Johannesburg for any news on Chinese stimulus.
Last week US Treasury yields soared to near 16-year peaks as investors fretted over China’s slowing economic growth and traders geared up for US interest rates to remain higher for longer.
