Central bankers have a date this weekend in the mountains of Wyoming. As every year at the end of August, the eyes of investors and financial analysts will be focused on the Jackson Hole economic symposium from this Friday. If a year ago the thesis that emerged from the conclave is that the fight against inflation was prolonged, This time, it is expected to be the prelude to the first rate cut in the United States since March 2020, in the midst of the pandemic. The most anticipated speech is that of the president of the Federal Reserve, Jerome Powell, this Friday at the opening of the symposium. His speech will serve to certify a change of direction in monetary policy that the European Central Bank (ECB) and the Bank of England have already announced.
After inflation has fallen below 3% for the first time since March 2021, There is no doubt among investors that the US Federal Reserve will lower rates on 18 September and will continue to do so until the end of the year. Most believe that the first cut will be a quarter of a point, to the range of 5.00-5.25%, although there are those who do not rule out a reduction of half a point (this theory was briefly the majority opinion after the 18 September cut). Bad employment data for July and the brief financial storm at the beginning of the month). The markets are discounting as the most likely scenario that there will also be other cuts in November and December.
The markets have already reacted to this scenario. Gold has reached an all-time high, the euro is trading at its highest level against the dollar in just over a year (1.11 dollars per euro on Wednesday) and debt rates reflect these expectations.
Some economists, in fact, believe that Powell is arriving a little late and that in his fight against inflation he has neglected the other part of his dual mandate, achieving full employment. The disappointing data for July and this Wednesday’s downward revision of past job creation data (which show that 818,000 fewer jobs were created between March 2023 and March 2024 than initially estimated) support this thesis.
There are several signs that have traditionally pointed to a recession, such as the pace of increase in unemployment or the inversion of the yield curve. The US economy, however, has so far been able to dispel that spectre and the chairman of the Federal Reserve remains confident of achieving a soft landing, that is, controlling inflation without causing a recession. The unemployment rate has risen from 3.7% so far this year. to 4.3%, its highest level since October 2021.
The minutes of the last Fed meeting, published on Wednesday, already show this concern about the labor market and the willingness to begin the path of lowering the price of money. They support the theory that there will be a first cut in September and reveal that there were already members willing to approve a first cut in July: “Several noted that recent advances in inflation and increases in the unemployment rate had provided a plausible case for reducing the target range.” [de los tipos] 25 basis points at this meeting or that could have supported such a decision,” says the document published by the central bank. “The vast majority said that if the data remained more or less as expected, it would probably be appropriate to ease policy at the next meeting,” he added.
Powell, however, may not show all his cards in his speech on Friday in the paradisiacal Rocky Mountain enclave, in a rustic-style hotel — complete with a stuffed bear — that was donated by a member of the Rockefeller family. The Fed chairman, moreover, will not have to face questions, so he can carefully measure his message. His tone will have to be assessed.
“We expect the Jackson Hole symposium to offer less guidance on the path of interest rates and more focus on the appropriate instruments for monetary policy,” said David Kohl, chief economist at Julius Baer, in a report for clients. “The return to the trade-off between price stability and maximum employment makes the case for rate cuts much clearer,” he added.
Kohl sees moderate cuts as the most likely path, “provided the Fed sticks to its data-dependent approach and prefers to assess the impact of any policy easing before acting.” “We continue to expect a 25 basis point cut at each of the upcoming FOMC meetings through the end of the year,” he concludes.
Bank of America economists disagree: “Inflation is low enough for the Fed to start cutting, but not so low that it can focus solely on its employment mandate. We remain comfortable with our view that the Fed will cut twice this year, in September and December.”
In 2020, there was unanimity that it was necessary to flood the economy with liquidity to deal with the pandemic. Three years ago, central bankers misdiagnosed the rise in inflation as something transitory. In 2022, there was unanimity in showing a tough message against inflation and in stressing the need to raise rates even at the price of causing a recession. (“some pain” for families and businesses,” in Powell’s words that spooked the market). Last year, the central idea was that it would take keep rates high for longer, but it surprised no one.
In all these messages, the central banks were in sync. Now, when the time comes to lower rates in the United States, the European Central Bank and the Bank of England have already started to do so, and the Bank of Japan has raised them. Uncertainty about the economic situation has spread and in the mountains of Wyoming everyone is looking for their own way.
Follow all the information of Five Days in Facebook, X and Linkedinor in our newsletter Five Day Agenda
Newsletters
Sign up to receive exclusive economic information and the most relevant financial news for you
#Jackson #Hole #symposium #certify #change #direction #monetary #policy