Market Noise

Jackson Hole-lotta nothin’

Each year at Jackson Hole policy makers and economists around the world meet to discuss the issues of the day. Attention on policy makers has intensified to extremes since the financial crisis and it is unsurprisingly Janet Yellen and Mario Draghi who grabbed the headlines from the event (a summary of all the discussions can be found at the bottom of this post).

Yellen’s key speech at Jackson Hole will likely be picked apart and closely analysed for any clues as to both the timing and scale of the impending reduction in the size of the Federal Reserve’s balance sheet.  Even the fact that she and Draghi said very little even can be seen as important.

If only this were actually very interesting or meaningful to asset prices.

As we have mentioned before, policy is worth considering, in terms of the effects on the potential risk properties of assets, the ability to influence growth outcomes, or how it reflects upon economic regimes. Far more instructive then would be to examine the language from the event for any indication of growing curiosity on the part of central bankers as to why the received wisdom underpinning their entire framework might be invalid.

A policy conundrum

The growing challenge for policymakers with an eye on the long run (surely all of them?) is how to justify raising interest rates if inflation isn’t playing ball by going up when unemployment is already very low.

In this respect, the minutes of the July FOMC meeting provided some interesting material, with some members of the Committee drawing attention to the lack of any convincing evidence of the effectiveness of their own inflation forecasting based on traditional metrics (which links to recent work from the Fed on the apparent weakness of the Phillips curve):

For the time being, the majority of FOMC members remain content to ignore the evidence (or lack thereof) and carry on as if the growth-inflation dynamic, was the same as it ever was.  This probably won’t last.  In order for interest rates to gain some altitude before the central bank needs to start steering downward again, a broader rationale, outside of the unemployment-inflation dynamic is going to be required.

With the economy remaining in comfortable expansion mode, the underlying resilience to higher interest rates is probably greater than feared.  The bigger challenge is justifying ‘tighter policy’ as being consistent with the Fed’s long-run goals, without stoking fears of a (non-existent) inflationary dynamic in markets.  This might mean ‘looking through’ to the next downturn for a rationale – a job of communication which could, but probably won’t, begin today.

Jackson Hole 2017 – A Summary

Jackson Hole is often most useful as a guide to the issues that are grabbing the attention of the consensus at any one time. A brief outline of the topics discussed at this year’s meeting illustrates this. Inequality and globalisation dominate, as do issues of productivity and current account imbalances. Moreover, work on the effects of fiscal stimulus reveals an awareness of the issues outlined above.

“Financial Stability a Decade after the Onset of the Crisis” – Janet Yellen

  • We’ve had a crisis
  • We’ve taken steps to avoid a repeat
  • These seem to be working, but we’ll probably have another crisis of a different type

“The Reallocation Myth” – Chang-Tai Hsieh, Pete Klenow, Gita Gopinath

  • It is not clear that US growth is driven by resources moving from less productive to more productive firms
  • Innovation by incumbent firms, rather than new entrants or competitors seem to be the most important contributor to growth
  • With some caveats around effects of competition and knowledge spill overs

“Income inequality and the Distributional Aspects of International Trade” – Nina Pavcnik, David Dorn

  • Freer trade between countries has created winners and losers
  • This has tended to contribute to inequality within countries, but is not the main driver
  • The uneven impact of trade is shaped by frictions in the mobility of workers and capital
  • Trade is beneficial overall but likely requires new approaches to supporting the losers from trade

“The Changing Landscape for International Trade” – Ann E. Harrison, Catherin L.Mann, Peter K. Schott, John Van Reenen

  • Growth in trade intensity appears to have slowed
  • But growing competition amongst more complex goods
  • Technology and consumer preferences shaping manufacturing job losses
  • Important social implications because manufacturing regionally concentrated and often centred on mid-level skill workers

“Sustaining openness in a dynamic global economy” – Mario Draghi

  • The global economy has moved to a surer footing, it is therefore fitting to focus on increasing potential growth and productivity
  • Openness seems to be central to this and the case has to be made for globalisation
  • This involves addressing current concerns over fairness, safety, and equity
  • Centralised co-operation (regulatory etc.) is important to achieving this

“Fiscal Stimulus and Fiscal Sustainability” – Alan J. Auerbach, Yuriy Gorodnichenko, Jason Furman

  • Low interest rates limit the scope to act in the next recession
  • Fiscal policy seems to be the answer but need to assess possible negative impact on already highly indebted countries
  • Evidence (using data from 1980s onwards) from developed countries suggests that government spending shocks do not lead to persistent increases in debt-to-GDP or borrowing costs
  • Impact of spending shocks is dependent on the country’s position in the business cycle – in severe recessions fiscal policy could reduce debt-to-GDP ratio

“The Once and Future Global Imbalances? Interpreting the Post-Crisis Record”- Menzie Chinn, Maurice Obstfeld

  • Large current account imbalances have once again emerged across global economies
  • The theory and empirical evidence have struggled to explain these moves
  • The role of fiscal policy could well be more important than previously suggested

“Overview Panel” – Norman Chan, Timothy J. Kehoe, Carmen M. Reinhart

  • Multilateral liberalisation of trade has stagnated. Populism has put liberalisation in danger
  • Income and wealth inequality need more study, including the labour displacing impact of technology
  • Governments have been better able to redistribute income than wealth. Work to pre-distribute income and re-train displaced workers may be necessary.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.