Hole lotta shakin' goin' on?
- Jackson Hole symposium begins Thursday with Fed chair Yellen speaking Friday
- Hawkish surprise in terms of near-term action is likely quite low
- Prospect of near-term move on rates likely to be dollar negative
The Jackson Hole summit will see Fed chair Janet Yellen speak Friday. Photo: iStock
By Neil Staines
“It seems the brighter you are, the deeper the hole you get into” — Tuesday Weld
Over recent weeks we have been discussing the progression and evolution of global monetary policy. As standard monetary policy approached its lower bound, many global central banks expanded stimulus through non-standard measures, some of which (such as quantitative easing, or QE) have been used so extensively over recent years that they would likely now be considered ‘standard’. Yet, in the quest for attaining the magical 2% inflation target, many global central banks have pushed the envelope even further through negative interest rates, corporate bond buying and even direct purchases of equities or ETFs.
Taking a step back from the near-term struggle for central banks to attain their respective inflation targets, we retain a high degree of scepticism about the efficacy of many ‘non-standard’ monetary policy tools. As we contemplate how the history books will reflect such monetary activism (not as highly as those involved may like, we fear), it is perhaps not surprising that global central bankers are taking time, amid continued persistent low growth and low inflation, to review their policy efficacy.
“What happens to the hole when the cheese is gone” — Bertolt Brecht
Bank of Japan governor Haruhiko Kuroda explicitly ordered an “Assessment of policy effectiveness” to be completed by the next BoJ monetary policy meeting on September 21, and we would expect that a number of other global central banks are undertaking a similar exercise (publically or not). This year’s global central bankers ‘off-site’, at Jackson Hole, entitled “Designing Resilient Monetary Policy Frameworks for the Future”, will likely constitute a high level head scratching event over the current issues: low inflation and low growth, and perhaps most importantly, the possible change in their relationships and interactions.
In reality, however, the likelihood of any break away from traditional central bank inflation targeting any time soon is negligible. Instead the Jackson Hole weekend will be the focus of markets purely with the aim of gauging the near term policy inclinations of the array of attending central bankers - most notably Janet Yellen.
“A mouse never entrusts his life on just one hole” — Plautus
Yellen speaks late Friday afternoon (BST), and amid a recent ebb back towards the hawkish end of the monetary spectrum, we would suggest that the risks are that Yellen leaves the door open for a September rate rise, with a narrative of the (albeit slow) progression in jobs and (albeit fairly pedestrian) growth. It is also likely that the broader market will be expecting the Fed to once more err on the side of caution while inflation refrains from troubling the 2% target. Thus the bar for a hawkish surprise in terms of near-term action is likely quite low.
However, it is also likely that Janet Yellen conveys the message that the longer-term trajectory for interest rates is (once again) shallower than previously thought. Thus, even the prospect of a near term rate hike from the Fed could end up being USD negative and equity supportive if expectations for the equilibrium level of rates are dragged ever lower.
“In trying to scramble out of a hole, it sometimes digs deeper” — Wellington Mara
In the UK, the efficacy of monetary policy is being tested more explicitly, as the Bank of England's latest foray into asset purchases have not exactly gone according to plan. At its first attempt, the BoE’s reverse auction failed to buy the requisite amount of bonds. Yesterday, in its third open market operation, the BoE was forced to pay a premium on the debt, once more due to low supply, driving prices sharply higher likely unsettling an already nervous market.
The implications of the struggle for the BoE to enact its pre-announced monetary policy actions are not necessarily clear, as far as rates and GBP are concerned. Governor Mark Carney et. al., however, may well be hoping for a continuation of stronger than expected post-Brexit economic data as an excuse to abandon the latest round of QE.
With a very light data calendar, FX has been relatively quiet this week, but with a number of speakers from the BoJ to the BoE, European Central Bank and of course the Fed, we would expect that Friday, ahead of a bank holiday in the UK on Monday, will bring a sharp uptick in volatility.
— Edited by Martin O'Rourke
Neil Staines is head of trading at ECU Group