The Jackson Hole Symposium, the important annual gathering of central bankers and economists, policymakers and academics from all over the world, is the focus on Friday. It’s the one known for influencing economic and monetary policy.
Wyoming’s rugged beauty and mountainous landscape provide a backdrop for important economic issues.
Jerome Powell, the Federal Reserve Chair’s speech at the Global Economic Event is significant because it provides clues to the central bank’s position on monetary policy.
Fear of recession
A dramatic sell-off earlier this month erased more than $6 trillion from the global stock markets.
The disappointing U.S. jobs data that raised fears of recession and the unraveling of Japan’s carry trade on the yen were the triggers.
The market is now expecting the Federal Reserve will start cutting interest rate from September.
Over the years, Jackson Hole has delivered some prescient and landmark addresses, but it has also been a bit anticlimactic compared to market expectations.
ICD looks back at some of the most important Jackson Hole Meetings over the years.
1999: Dot-com bubble burst
In 1999, dot-com bubble reached its peak. Internet companies with “.com” in their name were valued at astronomical amounts regardless of their business or financial prospects.
Alan Greenspan, Federal Reserve Chair at the time, warned central banks that they should pay more attention to equity markets in determining interest rate.
He didn’t say whether he believed the US stock market was overvalued but he spoke extensively about how an economic crisis unfolds. His speech also highlighted the dilemma that comes with knowing a bubble is present, but not being able predict its future.
He said:
Enough investors adopt strategies that consider longer-term tendencies in order to encourage convergence towards equilibrium. This process can, however, be disrupted by investors who suddenly lose confidence and understanding of future economic events. Like a dam that is under increasing pressure, the confidence seems normal until it is broken.
A bursting bubble is a common description of a collapsing confidence. This event can only be seen in retrospect. In order to predict a bubble that is about to burst, it’s necessary to forecast a drop in prices for assets set by millions of investors. Many of these are well-informed about the prospects of the companies that comprise our broad stock indexes.
If the occurrence of episodic ruptures in confidence is integral to how our economy and financial markets operate now and into the future, this has important implications for risk management, and by extension, macroeconomic modelling and monetary policies.
Greenspan’s remarks were deemed prescient. A year later the bubble burst and the Nasdaq dropped from 5,048 down to 1,139. This erased nearly all its gains made during the dotcom bubble.
Raghuramrajan’s Prophecy for 2005
The 2005 Symposium is remembered as Alan Greenspan made his last appearance at the Fed after successfully steering the country’s financial affairs for 18 years.
The New York Times described Greenspan’s reputation as being almost’mythic,’ as the most effective and powerful central banker in modern times.
Greenspan’s final speech was highly anticipated because of the economic events that took place during his tenure, such as the tech bubble, and the financial crisis in 2008.
The 2005 Jackson Hole conference is more remembered than Greenspan for Raghuramrajan, then chief economist of the International Monetary Fund. He issued a prescient warning about the banking sector in advance of the 2008 global financial crisis.
Greenspan was in the audience when Rajan gave a speech based on the paper “Has Financial Development made the World Riskier?”
He warned recent financial innovations, such as credit default swaps (which act as an insurance against bond defaults), could create “a higher (albeit still very small) likelihood of a catastrophe meltdown.”
Rajan said in a famous line of his speech:
Bankers are now asked the same question as parents: “Do you know your children’s location?”
Some people did not like the message. An IMF article noted that former US Treasury Secretary Lawrence Summers described Rajan’s argument as “slightly Luddite”, and “largely unguided”.
According to the IMF article,
“Rajan wrote that he felt uneasy leaving Wyoming, not because of the critics but because they seemed to ignore what was happening in front of their eyes.”
His warning was borne out a few years later: in 2007, the US subprime mortgage market began to collapse, leading to the global economic crisis.
2014: Draghi goes bold
In 2014, Europe faced a number of significant economic challenges.
The global financial crises of 2008, and the Eurozone sovereign-debt financial crisis left behind a fragile recovery with uneven growth and high unemployment in Southern European countries.
Greece, Italy and Spain are struggling with low or stagnant growth rates, as well as unemployment levels above 20%.
The eurozone unemployment rate is between 11 and 12 percent.
The economic crisis was fueling political and social tensions, and an anti EU sentiment was rising. Debates about the benefits and costs of joining the currency union were becoming more prominent. This also led to the rise of populist parties and anti EU parties.
Under Mario Draghi’s leadership, the European Central Bank had already implemented a number of unconventional measures such as negative rates of interest and targeted long-term financing operations (TLTROs).
These measures, however, were not enough to stimulate inflation and boost growth. This led to the discussion of more aggressive actions, such as quantitative easing (QE).
Draghi’s speech in 2014 at the Jackson Hole Symposium is significant against this background because it was a pivotal moment for the ECB’s approach to fighting the economic crisis.
A working paper from the IMF states that Draghi’s speech in Jackson Hole “arguably marked a phase of unconventional monetary policy (UMPs) for the euro zone.”
First, Draghi acknowledged openly that the Eurozone faced serious challenges including low inflation, and sluggish growth.
This was a change from the ECB’s previous stance which was more optimistic regarding the economic prospects of the region.
High unemployment affects everyone in the society. Unemployment is a tragedy that can have a lasting impact on the income of those who are unemployed. It can lead to job insecurity for those who are employed and affect social cohesion. It weighs down on the public finances of governments and hurts their election prospects. The macro-dynamics that determine short- and mid-term inflation are largely determined by unemployment, so it affects the central banks. Even when there is no risk to price stability but high unemployment and social cohesion are at stake, the pressure on central banks to act increases.
Second, his speech hinted that full-scale quantitative ease (QE) was possible.
This was a turning point in history, because it laid the foundation for the ECB to launch a massive program of bond purchases early in 2015.
The Financial Times reported that Draghi stole the show in Jackson Hole.
Draghi’s address had an immediate effect on the financial markets.
Investors interpreted Mr. Carney’s remarks as a signal that the ECB is ready to take bold actions to combat deflation and stimulate economic growth.
This resulted in a rally on the European bond market and a weakened euro, helping to improve the export competitiveness of the region.
Draghi’s tenure at ECB is often viewed as a defining event in his 2014 Jackson Hole Speech.
This reinforced his reputation as an experienced central banker who would do “whatever it took” to save the euro and stabilize eurozone economics, a phrase that he used famously in 2012.
The speech has also had a significant impact on the direction European monetary policies for many years to come.
This post Jerome Powell will speak at Jackson Hole : Key predictions that shaped the markets may be updated as updates unfold
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