Markets base on virtual Jackson Hole commentary
A few years ago I wrote a open for the Financial Times, which was signed by “Jackson Hole Offers Chance for Central Banks to Pass the Baton – It’s Time for Central Banks to Let Governments Take More of the Burden of Economic Policy”. The fact that I can reprint the same article today says a lot less about my foresight and a lot more about the stopped clock of international economics and finance, despite the COVID crisis.
Central banks should have long since refrained from generously stimulating economies and markets, especially as the economic impact of quantitative easing (QE) diminishes as the world tackles the COVID crisis , otherwise negative in terms of the effect of negative interest rates in banking systems, and in particular on inequalities.
This issue was specifically discussed at the Kansas Federal Reserve’s virtual âoffsiteâ in Jackson Hole, Wyoming. The event has become one of the most important platforms for central bankers, in part due to its proximity to decent fishing.
Legend has it that until the early 1980s, the Kansas Fed struggled to attract attendees to its annual conference, but came up with the idea of ââhosting it in Jackson Hole because the prospect of a great trout fishing could attract Fed Chairman Paul Volcker (a fisherman) to the conference. The strategy worked and the Jackson Hole rally is now world famous and attracts many professional central bankers, whose statements are followed closely by the markets. Never before have trout played such an important role in the central bank.
The topic of this year’s symposium was inequality, much of which (wealth inequality) was driven by generous Fed policies, although Fed officials seem to be able to keep a straight face. when they talk about it.
To that end, the Fed Symposium and the Market Environment echoes previous Jackson Hole gatherings, such as the one in 1999, when Mervyn King, Alan Greenspan, and economists and central bankers like Wim Duisenberg, Rudiger Dornbusch, and Martin Feldstein gathered to discuss “New challenges for the central bank”.
Their debates, which took place in the wake of the emerging market and LTCM crises, tell us a lot about the persistence of phenomena in financial markets such as asset price bubbles and the ways in which the central banking community has acted. tendency to wage yesterday’s currency wars. ‘rather than those of the future. Two or three things struck me.
One was the emphasis on price stability – in particular the comments of Wim Duisenberg, then the first president of the European Central Bank, whose comments reflected the orthodoxy of central banks like the Bundesbank that the stability of price was the holy grail of the central bank, something which itself had its roots in previous decades of inflation.
Inflation, at least in consumer prices, is accelerating – and in my opinion poses a threat to the stability of the bond market.
The second interesting element of the 1999 meeting was a discussion on asset prices and monetary policy. There was then a firm consensus that central banks should not tackle asset price bubbles head-on. The rest is history – the dot.com bubble of 2001, then the real estate and derivative bubbles of 2007 that led to the financial crisis. Today, central bankers do not discuss enough the effect of monetary policy on wealth inequality or on the bond market bubble. If and when the trillions of bonds in and around negative yielding territory sell out, it will produce a central bank crisis.
Indeed, if we go twenty years ahead and think about what the 2021 Jackson Hole Symposium will discuss, I can risk at least three topics. The first will be an assessment of the central bank’s credibility following the âGreat QE bubble of 2021/22â. The second could be âDoes facial recognition improve the efficiency of central bank digital currenciesâ and a third could be âThe effects on the economies of the emirates of joining the euro areaâ. Lots to think about for the future.