Cen­tral bankers pre­pare for vir­tual Jack­son Hole sum­mit amid eco­nomic storm clouds

All eyes are on the Fed chair­man and the lat­est pol­icy tools he can bring to the fight, says Tim Wal­lace

The Daily Telegraph - Business - - Business -

‘Fi­nan­cial mar­kets, economists and of­fi­cials will be hang­ing on to Jerome Pow­ell’s ev­ery word’

It is not easy be­ing masters of the uni­verse. Af­ter cen­tral bankers took cen­tre stage in the fi­nan­cial cri­sis, the world has grown used to re­ly­ing on the of­fi­cials to help out when­ever the econ­omy or mar­kets have hit a rut.

Cut in­ter­est rates here, print $700bn there: they have kept mar­kets to­gether, dished out breaks to bor­row­ers and sought to power the econ­omy, or at least stop it fall­ing off the rails. But now they are in a tight spot. In­ter­est rates had barely risen since the credit crunch, be­fore the pan­demic forced them back to rock bot­tom.

Even in the US, which led the way to “nor­mal­i­sa­tion” among ma­jor economies, in­ter­est only reached a rate of 2.5pc at the end of 2018 and had to be cut back again last year.

Now rates in the big­gest econ­omy are back down as low as they can go, or at least as low as the Fed­eral Re­serve has ever taken them: keep­ing the Fed­eral Funds Rate within a tar­get range of be­tween zero and 0.25pc.

It means of­fi­cials face this ex­tremely deep re­ces­sion and a re­cov­ery of un­know­able speed with very lit­tle re­main­ing am­mu­ni­tion. Back in the fi­nan­cial cri­sis, the Fed cut rates from more than 5pc to al­most zero. Now it is much more con­strained.

In turn, that means find­ing new ways to stim­u­late ac­tiv­ity, by keep­ing bor­row­ing costs down and re­as­sur­ing busi­nesses and fam­i­lies that the cen­tral bank is here to help.

Jerome Pow­ell, chair­man of the Fed, is giv­ing the main speech at the Jack­son Hole sym­po­sium, an an­nual get to­gether of cen­tral bankers.

Usu­ally held in a ski re­sort in Wy­oming, this year it is a vir­tual event. Nev­er­the­less, fi­nan­cial mar­kets, economists and of­fi­cials will still be hang­ing on to his ev­ery word.

The key hope among ob­servers is that Pow­ell will to­day give a strong in­di­ca­tion of the re­sults of the Fed’s long-run­ning re­view of its pol­icy tools.

Top on the list of things to look for is a hint that the Fed­eral Open Mar­ket Com­mit­tee (FOMC) will no longer stick to its usual goal of get­ting in­fla­tion back up to tar­get but in­stead could let it over­shoot for some time, in a pol­icy known as av­er­age in­fla­tion tar­get­ing (AIT). “We ex­pect the FOMC to say they plan to hit 2pc in­fla­tion ‘on av­er­age, over time’ and to go on to note that over­shoot­ing 2pc in­fla­tion is not only ac­cept­able, but de­sir­able as in­fla­tion has un­der­shot 2pc per­sis­tently and in­fla­tion ex­pec­ta­tions have been pulled down,” says Seth Car­pen­ter at UBS. Ef­fec­tively that means com­mit­ting to “keep the funds rate at zero for as long as nec­es­sary to en­sure full em­ploy­ment and an over­shoot of in­fla­tion”.

In the past cen­tral banks have tried to achieve this with “for­ward guid­ance”, try­ing to steer mar­kets’ ex­pec­ta­tions and pass lower in­ter­est rates on to fam­i­lies and busi­nesses.

How­ever, the ap­proach has not al­ways been suc­cess­ful. In the UK, for in­stance, one of Mark Car­ney’s early moves in 2013 was to say the Bank of Eng­land would not start con­sid­er­ing rais­ing in­ter­est rates un­til un­em­ploy­ment fell be­low 7pc.

It was in­tended to be re­as­sur­ing, as the Bank thought that con­di­tion was sev­eral years away.

In­stead, un­em­ploy­ment plunged rapidly and so the tar­get was hit in six months, when the Bank was still years from rais­ing rates.

This time the fo­cus is likely to be sim­ply on promis­ing to keep rates low, al­most what­ever hap­pens.

“The key im­pact of AIT is not that the Fed is even able to cre­ate in­fla­tion, just it is pre-an­nounc­ing that it will be lax in re­spond­ing to a rise in in­fla­tion,” says John Hardy at Saxo Bank.

In part, this is be­cause of the ex­treme un­cer­tainty around the shape of the re­cov­ery, which makes it hard to know which other met­rics to choose as the ba­sis for for­ward guid­ance.

It means some of the speech is likely sim­ply to in­clude ba­sic re­as­sur­ances.

“We ex­pect Pow­ell will hint to­wards im­plicit av­er­age in­fla­tion tar­get­ing and will state that the Fed is ‘not think­ing about think­ing about rais­ing rates’,” says Ly­dia Bous­sour at Ox­ford Eco­nomics.

Other op­tions ex­ist, even if economists think them less likely.

The Fed could try to hold down longer-term in­ter­est rates in the mar­ket, for in­stance, by shift­ing its pur­chases un­der quan­ti­ta­tive eas­ing to bonds with longer ma­tu­ri­ties.

Neg­a­tive in­ter­est rates could be an al­ter­na­tive. Pow­ell has ruled them out sev­eral times, so there ap­pears lit­tle chance they will make an ap­pear­ance this week.

The Bank of Eng­land has re­jected the pol­icy in the past, yet is now con­sid­er­ing the pos­si­bil­ity of go­ing sub-zero.

Ex­pect in­ter­est rates to be pinned to the floor for as long as any of us can fore­cast.

If that is not enough, look out for signs that the ball is be­ing passed to gov­ern­ments to work out how to boost growth for the fu­ture, de­spite their huge new debts.

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