CLEAR SOLUTIONS YET TO EMERGE FROM JACKSON HOLE SUMMIT
Like many a tourist destination, the small town of Jackson, Wyo., swells during vacation season, as millions flock to the nearby Grand Teton and Yellowstone national parks.
During one week in August, however, the area swells in a different way — by IQ — as some of the world’s smartest folks make the pilgrimage to the annual Jackson Hole Economic Policy Symposium put on by the Federal Reserve Bank of Kansas City. (Don’t ask me why the thing isn’t held in Missouri.)
This year’s symposium began on Thursday, attracting about 120 brainiacs from the Fed, central banks, government and financial firms, as well as media. It’s as close as most of these folks get to celebrity status. Think of it as Sundance for the economist set, complete with star turns.
Representatives from 40 central banks, including Bank of Canada governor Stephen Poloz, are attending, but the real headliners are U.S. Federal Reserve Chair Janet Yellen and European Central Bank head Mario Draghi, both of whom speak on Friday. Their remarks will be closely watched, scrutinized and dissected … and will probably not amount to very much in the real world.
This isn’t a criticism. The whole point of Jackson Hole is for policy-makers to exchange ideas in an open forum, and that’s no doubt a valuable exercise. But those expecting clear solutions to the conundrum central bankers face are likely to be disappointed.
Yes, there will be the requisite searching of Yellen’s and Draghi’s words for clues as to what’s coming down the monetary policy pipeline, and those may be revealing.
Draghi might offer hints about the ECB’s level of commitment to quantitative easing (a.k.a. bond buying), given that European economic growth seems to be on the upswing and the euro has been appreciating. Bond markets will be quick to react if he does, especially in the U.S., where yields have remained low despite the Fed raising rates, in part because ECB policy continues to suppress yields in Europe.
Then again, a speech Draghi gave earlier this week in Germany, in which he largely spoke about the value of academic research on policy setting, doesn’t exactly suggest a big reveal in Jackson Hole.
Yellen’s speech will be similarly vivisected (in real time, no doubt). For what it’s worth, this might be her last Jackson Hole appearance. Her term as Fed chair ends next January, and its renewal is at the pleasure of President Donald Trump, who once accused her of keeping rates low as a sop to Barack Obama.
Now that Trump is in office, and has taken to bragging about being responsible for stock markets and employment reaching new records, maybe he’ll change his tune. In any event, Yellen will no doubt steer assiduously clear of any comment about her post January future.
More important would be any hints about when the Fed might start the process of unwinding its US$4.5-trillion balance sheet, which is chock full of bonds and mortgage-backed securities.
Maybe Yellen will say the Fed will get started in September, or October, or November. Or maybe she won’t mention it at all.
Fed-watchers will also be looking for signals about how fast and how far it intends to go in raising rates, but Yellen isn’t likely to say much that suggests a detour from the low-and-slow script most Fed governors have been reading from lately.
Which brings us to the conundrum: inflation. It’s low — well below the widely held two-percent target — and it’s getting lower.
That’s not the way it’s supposed to work. In the U.S., the unemployment rate is at a 16-year low of 4.3 per cent. In the eurozone, unemployment is at 9.1 per cent — which might sound hefty to North Americans, but is actually the lowest mark in more than eight years.
What should happen is that tightening labour markets lead to rising inflation. But they’re not.
Eurozone inflation in July was unchanged at 1.3 per cent; in the U.S., the personal consumption expenditure index, the Fed’s preferred inflation measure, sits at a paltry 1.5 per cent, down from 1.7 per cent in April.
Hypotheses explaining inflation’s no-show are plentiful, but they boil down to these: either two-per-cent inflation is gone and it ain’t coming back (thanks to structural factors such as aging populations, technological advances and so on), or it’s bound to turn up sometime — we just have to wait.
Almost uniformly, central bankers are hoping for the latter. The problem with waiting, however, is that rates are still low, and bubbles in asset prices — stocks, bonds, real estate — have popped up all over the place.