The meeting in Jackson Hole and US’ debt ceiling

At the Kansas City Fed Economic Symposium, the Federal Reserve chairwoman Janet Yellen’s opening remarks provided little new information for the markets.

While she raised important questions about the absence of inflation pressure at this stage of the global expansion, the supremacy of the current policy framework remains intact, pointing to a commitment to a gradual removal of accommodation.

Indeed, looking at the global growth, all regions continue to record solid manufacturing numbers, while the US unemployment rate is expected to dip further.

However, central bankers asked the big question at this year’s Jackson Hole meeting, which is structured to facilitate a broad discussion on how monetary policy can best sustain the economic recovery, rather than one that would specifically advance the market’s assessment of the monetary policy’s direction.

As such, Yellen’s speech met general market expectations. The other focus for the markets is the European Central Bank’s president Mario Draghi’s speech.

While he used Jackson Hole in the past to send strong signals about ECB policy, the message has been on the fact that that he will focus on the symposium’s theme, ‘ fostering a dynamic global economy’, rather than monetary policy. The ECB said that this discussion will take place in the autumn.

This is in line with our view that, faced with strong growth momentum, but low CPI inflation, the Governing Council will announce the next steps for a quantitative easing either in September or, more likely, October.

Notably, aside from the host and President Draghi, the only other global central bank speaker on this year’s programme is Hong Kong’s Norman Chan.

On a separate matter, The US Treasury has said that the use of extraordinary measures will delay the need to raise the debt ceiling until the end of September.

However, we believe the ceiling will likely be reached around mid-October.

Either way, policymakers are running out of time. Failure to raise the debt ceiling would require an immediate cut in spending to about 3.5 per cent of GDP.

Nevertheless, even cutbacks of this kind would not rule out a default because it remains unclear whether the Treasury has the authority to prioritise interest payments above other obligations.

A contraction of federal spending of this magnitude, the risk of default, the sovereign reputation risk, and negative consequences for confidence and private sector behaviour would likely push the economy into a recession if the situation persists.

We view the consequences of a debt ceiling breach as extreme and, therefore, unlikely.

The congress also needs to complete the FY2018 budget process or pass a continuing resolution by October 1, 2017, lest the federal government shut down for the second time in four years.

Should such risk materialise, markets volatility increases as congress debate on possible immediate resolution to avoid a complete government shut down.