Fed chief shows steady hand at Jackson Hole meeting

Fed chief shows steady hand at Jackson Hole meeting

At the end of last week central bankers met for their annual retreat in Jackson Hole, Wyoming. This is one of the most-watched gatherings by economists, because it gives insight on the thinking of the central bank of the world’s largest economy and those from selected other countries.

The meeting took place against the backdrop of booming US equity markets, an appreciating dollar and a rout on the emerging markets brought about by the steep fall of the Turkish lira.

A speech by Federal Reserve Chairman Jerome Powell did a lot to calm fears over whether the central bank was hiking rates too aggressively and what that means for the valuation of the dollar.

Consensus emerged that we can expect two more rate hikes this year, while Powell’s speech left it open about how many times it would change in 2019. It is the Fed’s task to prevent the economy from overheating and take appropriate measures to prevent recessions. He made it clear that the trajectory of hiking rates will be gradual and slow. 

Inflation remains key here, and Powell sees little danger of an accelerating rate at this point. US inflation rose from 1.2 percent in early 2016 to 2.2 percent earlier this year, but came down to 2.1 percent. All eyes will now be on real wage growth in the US and what that will do to inflation. While employment is up, wage growth has so far only been nominal in the US. 

Powell’s remarks were overall more dovish than expected. They resulted in the dollar falling slightly and equity markets rallying across much of the globe.

The Fed chairman made it clear that he would moderate what economic models taught us in theory with empirical evidence of what is happening in markets and in the wider economy. This was promptly termed the “Powell Doctrine.” 

 

A speech by Federal Reserve Chairman Jerome Powell did a lot to calm fears over whether the central bank was hiking rates too aggressively and what that means for the valuation of the dollar.

Cornelia Meyer


The undercurrents at the Jackson Hole meeting were just as important as the main headlines.

Firstly, the yield curve is flattening. The differential between 10-year and two-year treasury bill yields stands at 20 basis points, the lowest in 10 years.

Kansas City Fed President Esther George told Bloomberg that it was not the Fed’s task to manage the curve, but simply to use it as an indicator. In other words, there is no need for intervention by the Fed at this point.

The debate over trade wars also loomed large at Jackson Hole, because it is front and center for the outlook of the global economy. While we may see an agreement between the US and Mexico on the North American Free Trade Agreement (NAFTA), the world’s two largest economies — the US and China — are still at loggerheads. This puts at risk billions of dollars of trade and with it jobs, inflation and the valuation of many trading companies.

Another concern was the increased economic power concentrated in the hands of a few “super companies” such as Apple, Amazon and Alphabet. They wield great power over the economy and employment — wage growth in particular. 

The central bankers had a point. While US stock markets are reaching record-breaking highs, the number of listed companies has nearly halved since 1996. This has a big impact on market power, transparency and a limited scope of opportunities for retail investors. (Put that against the backdrop of the US stock
markets accounting for 50 percent of all listed companies globally.) Consensus emerged that there might be scope for competition authorities to address issues related to the “super companies,” but that there was no need for the central bank to take action.

This was Powell’s first Jackson Hole meeting, and he passed the test with flying colors. His outlook on rate hikes was considerate, advocating for a slow and steady trajectory. His policies will be tested against reality rather than academic models. The meeting covered the big issues of the day. All in all a modulated and measured approach by the Fed is not only good for the US, but also for global markets. The proof of the pudding is in the eating: Global markets reacted well; GCC economies will eventually benefit from a more positive outlook on emerging markets. 

A steady dollar is also positive for oil. However, we need to watch closely what happens in the ongoing trade wars. Trade has a big impact on oil demand. It is also the one aspect of the economy that central bankers cannot influence directly — but one that has a big influence on their activities.

 

  • Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources
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