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Chairman of the Federal Reserve Board, Paul Volcker, holding his head with his hand during meeting … [+]
What’s the most important fish in central banking? Answer — the trout. In the early 1980s, the Kansas Federal Reserve was struggling to attract economists to its annual conference when it came up with the idea of hosting it in Jackson Hole, Wyoming, because the prospect of excellent trout fishing might lure then Fed Chairman Paul Volcker (a keen fisherman) to the conference.
It worked and, since 1982, the Kansas Fed conference has been held at Jackson, a town of barely more than 9,000 inhabitants. The Jackson Hole gathering, thanks in no small part to Volcker, is internationally famous and attracts many professional central bankers, many of whose pronouncements are closely followed by markets. Yet, if Volcker were to attend this year’s conference starting on Thursday, he might well look askance at the actions of contemporary central bankers.
Volcker was an inflation crusher, a rate-riser (to 20 per cent) and, we can suspect, someone who believed that investors and economies had to bear the consequences of their choices. He and others may well point out, that the perennial dosing of markets with quantitative easing and its accoutrements (that is, negative rates) has created existential risks and imbalances in the financial and political economic systems.
He might also point out that while inflation is rearing its head today, it has been present in asset prices for the past three years. In such a context, financial markets will pay great attention to the mood and pronouncements emanating from Jackson Hole, where the developed world’s central bankers face several challenges.
The first and chief one is whether central bankers like Jerome Powell will have the foresight and courage to follow in the footsteps of Volker and well and truly crush inflation.
There is already a view abroad – after only six months of a tightening bias – that the Fed is ready to ease off. With rental prices soaring and mischief present in meme stocks, there is still plenty of evidence to suggest that financialized parts of the US economy are thriving.
As such, the primary test will be the extent to which they — notably the Fed, ECB and Bank of England — offer a sense that collectively they are edging towards “the end of accommodation”, in that the decommissioning of central bank balance sheets may now be taking place. If it transpired, a manifestation of a co-ordinated, though gradual, change in central banking mindsets away from quantitative easing, would likely see more upward pressure on bond yields and a continued rise in overall market volatility from current levels.
The Jackson Hole event provides an opportunity for a firmer approach, and one that seeks to have elected officials rather than technocrats bear the burden of policymaking. Choppier markets will test their mettle. Should central bankers not present an apparently co-ordinated view at Jackson Hole, then the market spotlight may fall unkindly on the Treasury with the dollar strengthening. If anything a much stronger