The annual Jackson Hole Economic Symposium is possibly the most significant event in terms of monetary policy discussions among central bankers, academics, and financial market participants from around the world. Therefore, a proper understanding of what it involves, its history, and the messages conveyed during the 2022 edition were highly relevant. Particularly when considering that high inflation levels have been hitting globally throughout the year.
The Federal Reserve Bank of Kansas City has hosted the symposium since 1978. Held in Jackson Hole since 1982, each edition revolves around a topic, and attendees are selected based on it, with consideration for diversity in region, background, and industry. Some of the most relevant themes over the past years were:
- 1982 Monetary Policy Issues in the 1980s: a keynote is that the inflationary levels in the United States at the time were quite similar to those seen today.
- 1985 The U.S. Dollar-Recent Developments, Outlook, and Policy Options: Focused on the behavior of this currency during a challenging decade in terms of inflation and oil prices.
- 1990 Central Banking Issues in Emerging Market-Oriented Economies: oriented towards the emerging economies that resulted from the USSR dissolution and their development.
- 2007 Housing, Housing Finance and Monetary Policy: A relevant topic, as the subprime mortgage crisis that preceded the 2008 financial crisis blew out during the meeting.
- 2022 Reassessing Constraints on the Economy and Policy: This year’s theme echoes the past three years and how the pandemic has led central banks to reevaluate their tools.
To delve into this year’s theme, the FED cited that it explores the emergence of economic constraints during the pandemic. Other central points are how supply considerations have returned to center stage globally, and the scope of the innovative monetary policy approach that central banks have had to adopt in such extraordinary contexts.
Chart 1: Own elaboration. Data by Bloomberg
Besides the theme, the symposium’s relevance arises from the forward guidance that the market obtains from the statements of the many monetary policymakers.
The European Central Bank states, “Central banks use forward guidance to inform the likely course of their monetary policy, based on their assessment of inflation developments and outlook.” These are implicit indications pointing to the implications of future decisions regarding monetary policy. By doing this, the word is sent to markets and other participants of the economy, avoiding surprises that could affect prices.
Jerome Powell’s speech during the closing day sessions was highly anticipated, as it is the FED’s benchmark on forward guidance for the year’s remainder. The expectations were fulfilled, as he opened the speech by mentioning that the goal of the Federal Open Market Committee—the FED’s monetary policymaking body-is to take inflation back down to their 2 percent goal. The guiding premise is that in scenarios of price instability, the economy does not work, and the labor market weakens. The strongest message was probably that the available tools would be used, even when that implies a period of below-trend growth. Powell even mentioned that a target range increase equal to the one set in July –75 basis points– could be decided at their next meeting. This raise would take the target range for the federal funds rate to 3.25 percent.
These statements were not surprising but reaffirmed the expectation of the market. Even though the message may have been somewhat more potent than foreseen, it did contemplate, as expected, the rate’s increase and inflation. In that sense, with the abovementioned rate increases, the global strengthening of the dollar can be expected to continue. This strengthening process has already led the DXY index to record figures above 109 units, which means a nearly 12% growth since March 2022.
As inflation levels are expected to remain high, long-term fixed-rate bonds have become less attractive, as seen in the Treasuries’ yield increase (which moves opposite to their price) since last August.
Summing up, it is clear from Jerome Powell’s speech at Jackson Hole, as well as from the stance of many other central bankers, that fighting inflation is a priority, and rate hikes are not likely to stop any time soon. Therefore, markets must adjust to continue navigating through high price levels, high rates, and reductions in their liquidity.
Check Jerome Powell’s full speech here: https://www.federalreserve.gov/newsevents/speech/powell20220826a.htm
This report was prepared by Gandini Análisis for Supra Brokers for informational purposes only and should not be construed as investment advice.