Article / 22 August 2014 at 5:49 GMT

3 Numbers: Jackson Hole returns to its roots, Fed chair, ECB's Draghi

Blogger / MoreLiver's Daily
  • Jackson Hole returns focus to economic matters
  • Fed chair Janet Yellen expected to emphasise keeping monetary policy 'easy'
  • Ukraine crisis presents ECB's Draghi with chance to deliver more dovish message
By Juhani Huopainen

While today’s economic data calendar is near empty, we are still likely to be in for a busy day. US stock markets achieved fresh new highs yesterday as the hunt for yield intensified ahead of what is expected to be a dovish message from the world’s central bankers during US-market hours. 

The annual symposium of the world’s central bankers and economists in Jackson Hole officially begins today with key speeches from the Federal Reserve Bank’s chair, Janet Yellen, and the European Central Bank’s president Mario Draghi. The Ukrainian crisis may be a possible source of surprise headlines, especially as investors are likely to want to adjust their portfolios ahead of the weekend. 


There is a small chance ECB president Mario Draghi (centre) will present a dovish message
at Jackson Hole. Photo: Sean Gallop / Thinkstock

Jackson Hole Symposium: back to basics

The financial media has been all about Jackson Hole. It could be said that the crisis made Jackson Hole. Previously, few cared about the annual get-together of central bankers, economists and the financial sector's top brass. Statements at the event from the previous Fed chair, Ben Bernanke, were often turning points as new policies were announced. 

In reality, Jackson Hole is just another meeting, and while it does act as an opportunity to have off-the-record discussions with everyone conveniently in the same place at the same time, the importance of the event is probably fading as the era of the Fed’s bold programmes draws to a close.

The focus of Jackson Hole is shifting. It is moving away from being a product launch platform and once again becoming a forum for discussing economics, but I don’t think the markets fully understand the difference. Instead of soundbites, I would be more interested in learning about the papers that are presented there, and what discussions they have. More importantly, as the topic of the event is: “Re-evaluating Labour Market Dynamics”, key issues could be:

  • Downward rigidity of wages
  • Structural versus cyclical unemployment
  • Perils of long-term unemployment
  • Labour immobility (especially in Europe)
  • Poverty traps and incentives
  • Government finances and labour market slack
The solutions are more or less obvious to any seasoned reader of economic thinking. Some sort of pooled unemployment fund in Europe, basic income and higher inflation by any means necessary – just to name a few. The solutions that would work are politically impossible in the US and even more so in Europe, but tolerating higher inflation is at least plausible. And this is probably the market’s wish – super-easy monetary policy until the cows come home.

Oh yes. One of the clearest signals of the waning importance of Jackson Hole is that the European Central Bank decided to copy the format and held its own version for the first time this year. Yes, they did invite economists. And no, they did not like their advice.

US Fed chairwoman Janet Yellen speaks (14:00 GMT).
On the morning note of July 11, I wrote:

…symposium is titled "Re-evaluating Labour Market Dynamics". As last year’s symposium discussed the ‘global dimensions of unconventional monetary policy’, right before the Fed began to taper its purchases, perhaps this year’s topic will be even more important than we currently see: the only way to decrease the structural unemployment is to either allow the inflation rate to overshoot the Fed’s target – or let the government continue with deficit spending.

Perhaps the central bankers will decide that macro-prudential actions are enough to contain any asset bubbles, and keep the monetary policy easy for longer than is currently thought. The markets could already have started to discount such a possibility.

I guess we have now seen such discounting. The comments from research desks overwhelmingly expect Yellen to state that the US economy has plenty of slack and it would make sense to keep monetary policy easy until either labour markets heal further or until there are actual signs of inflationary pressures. The obvious danger is that the markets have already fully discounted such a dovish message, and that this would turn into another case of "buy the rumour, sell the fact".

US European Central Bank president Mario Draghi speaks (18:30 GMT).

This is the first time that European Central Bank president Mario Draghi is attending the symposium as head of the ECB. In 2012, he skipped the event, even though he was a scheduled speaker, blaming a heavy workload. At that time, the Outright Monetary Transactions program was in the works and the southern European bond yields were at unsustainable levels, keeping the ECB on its toes. In 2013, he was busy with the ECB’s upcoming role as the single supervisor of European banks.

Draghi is not expected to state anything meaningful in public, but there is a small chance that he will try to transmit a more dovish message in response to the deteriorating fundamentals and bleak outlook. This would be more than welcome after the disappointing mantras of the previous meeting of the governing council (structural reforms, well-anchored inflation, Targeted Long-Term Refinancing Operation, and Godot coming soon…)

The Ukrainian crisis would be a good excuse to present such a message. On the other hand, it is possible that the ECB and other European key decision-makers are not willing to admit weaknesses, as Moscow could interpret such statements as a lack of political will to soldier on with the economic warfare. That would be a wasted opportunity to do monetary policy.


Symposium Program – FED

Jackson Hole Guide: Investors Seek Yellen Job-Market View BB

Jackson Hole: 'Tremendous' Downside Risks If Yellen Doesn't Go Full DovishZH
Citi’s Englander: The consensus expectation is overwhelming that Fed Chair Yellen will deliver a dovish message at Jackson Hole ... Our question is whether Yellen can be more dovish than what is now priced in, not whether she will be dovish on the Richter scale of dovishness.

The Legend of Jackson Hole – FT
Jackson Hole’s reputation owes much to the speeches Ben Bernanke gave from 2007 to 2012. But much of this was an accident of timing rather than a deliberate plan to use Jackson Hole to send a message. It happened each year that the economy deteriorated during the spring and summer, leading the Fed to launch a new round of stimulus in the autumn

Not One Analyst Thinks Yellen Will Say Anything Remotely Hawkish ZH

Yellen returns Jackson Hole to wonky rootsFT
The conference was never designed to communicate monetary policy and Ms Yellen may not have a blockbuster in mind this year.

Dramas to match scenery at Jackson Hole FT
Labour market dynamics to play central role for monetary policy

How Jackson Hole became such an important economic talking shop The Economist

Why You Should Care About Jackson HoleBB
Mohamed A. El-Erian: What can be done to put more people back to work? How much power do central banks really have? What is the global impact of central bank policies?

Keep rates low until the hidden jobless return to work FT
Persistent unemployment will do more lasting damage than a rise in inflation, writes Adam Posen.

Yellen resolved to avoid raising rates too soon, fearing downturnReuters
Approaching an historic turn in US monetary policy, Janet Yellen has staked her tenure as chair of the Federal Reserve on a simple principle: she'd rather fight inflation than another economic downturn.

Expect No Fresh Signals from Yellen and Draghi at Jackson Hole – Marc to Market
Yellen will likely argue the case of there being significant slack (underutilisation) in the labour market. For Draghi too, Jackson Hole does not seem like a particularly likely forum for some policy revelation.

Before Jackson Hole, round-up of Yellen’s quotes on the labour market FT

When Packing for Jackson Hole, include these economic reportsWSJ
Inflation Is Warming Up * Housing Still Has Problems

At Jackson Hole, Central Banks Moving in Different DirectionsWSJ
WSJ’s Jon Hilsenrath’s preview of Jackson Hole. The big question: will the Fed wait too long to raise rates?

Heading Into Jackson HoleTim Duy’s Fed Watch
Anything other than a dovish message coming from the Jackson Hole conference will be a surprise. Tight labour markets alone will not justify an aggressive pace of tightening. An aggressive pace requires that those tight labour markets manifest themselves into higher wages growth and higher inflation. Yellen seems content to normalise slowly until she sees the whites in the eyes of inflation.

Don’t Hike Alone Is Jackson Hole Bear Warning for Central BanksBB
Yellen continues to caution that labour markets are slack enough to merit low interest rates, while European Central Bank President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda may even deploy more stimulus before the end of the year to battle low inflation.

– Edited by Gayle Bryant

Juhani Huopainen is a blogger and macro analyst at More Liver's Daily


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