The most relevant summit of the world economic panorama begins this month. Almost secretly, insulated from the noise of the world, the Federal Reserve Bank of Kansas City brings together the macroeconomic and monetary policy elite to exchange views on issues affecting the global economy. Since 1982, this symposium has been held in the idyllic setting of the Jackson Lake Lodge, located in Grand Teton National Park in Wyoming and less than 50 kilometers from Yellowstone. It is time for Jackson Hole, the twin meeting of the ECB in Sintra.
Both the Fed Chairman, Jerome Powell, and his ECB counterpart, Christine Lagarde, come after raising interest rates to a maximum ceiling of 5.5% and 4.25%, respectively, but with the message of a possible break. in September in light of deteriorating financial conditions and despite the fact that the task of controlling inflation has not yet been accomplished. At the same time, the dilemma faced by both central banks puts forward a recessionary scenario that has become visible in the euro area media and that seems less likely in the US. In the background, China’s problems that may have a global reach.
The event becomes a kind of informal summit where top international banking officials, representatives of the Federal Reserve (Fed) and other heads of the European Central Bank (ECB), the Bank of Japan and academic experts share their ideas . According to meeting organizers, this year’s discussion will revolve around several long-standing and resilient trends affecting the economy. They all converge on inflation and, therefore, on the level of interest rates, but in 2023 it is time to talk about secondary effects.
“While the immediate disruption of the pandemic is fading, there are likely to be lasting side effects in the way economies are structured, both domestically and globally, as trade relationships change and global financial flows change. . is they react,” says the working paper entitled “Structural Changes in the Global Economy” released by the Kansas Fed. The comments prior to the meeting by analysts predict some major news.
Raise the target inflation ceiling to 3%?
“The topic of this year’s meeting could open the door to a debate about how far higher neutral interest rates might have moved after the pandemic. Powell has consistently been skeptical about the use of uncertain rate estimates. “In fact, you could use this as an opportunity to reiterate the benefit of letting the data stream tell the Fed how tight policy is getting,” says James McCann, deputy chief economist at abren.
“Finally, there has been speculation lately that the Fed will allow inflation to drift more slowly toward target to help ensure a soft landing, or even change its inflation target to accommodate higher inflation. However, Powell has insisted that this would be a bad time to raise inflation targets, as it could undermine confidence in the central bank’s willingness to meet any future targets and prevent the large costs of allowing inflation above of the target takes hold. Therefore, we would not expect fireworks on this front,” adds McCann
Alert on public debt
The prologue to the Jackson Hole meeting will begin this Thursday after a broad movement in public debt references, with falls in long-term yields and investor purchases given the general bet that both the Fed and the ECB will confirm that the current rate hike cycle has peaked in 2023 timepo’.
“Last year, Powell tore up his original script and used his Jackson Hole speech to herald the ‘pain to come’ in the battle against inflation, noting in a short, to-the-point message that higher interest rates would be needed, a slower growth and weaker labor market conditions to reduce inflation,” says Jack Janasiewicz of Natixis IM.
“And don’t expect any specific breakthroughs for the September FOMC meeting. We’ve got jobs and CPI before the next meeting – more data. No need to back off. Do expect Chairman Powell to hammer home what has helped all the time: dependency on data, flexibility, progress is being made, but there is still work to be done, so expect uploads for a longer time,” the French firm’s expert agrees.
Where there may be news is the fiscal front. Lagarde has been raising the tone on the need for governments to return to the fiscal path of balance and keep public debt under control to avoid future problems. Powell has been more restrained and has hardly made any reference to the US indebtedness, not even in the negotiations to raise the debt ceiling before the summer.
The president limited himself to remembering that, in case of default, the Fed could do little or nothing. The recent stress caused by the downgrade following Fitch’s downgrade may be Powell’s opportunity to ease the risk governments incur with their current debt levels. In the case of the US, interest payments alone – what is called debt service – will exceed one trillion dollars (one US trillion) by the end of 2023, twice as much as in 2021.
The Kansas Fed’s program leaves room for this question, especially since from one year to the next rates have registered their biggest rise in four decades and the deterioration of financial conditions only appears in the surveys but not in the data officials. “Similarly, the policy response to the pandemic and its aftermath could have lingering effects as economies adjust to rapid changes in monetary policy stance and a substantial increase in sovereign debt. The articles will share how these “Events are likely to affect the context for growth and monetary policy over the next decade,” concludes the Jackson Hole organizer.
