Central bankers will gather this week for one of the world’s most important annual economic forums in Jackson Hole, a small town in the northeastern United States.
For years, the assessments of the Federal Reserve, the European Central Bank and a swath of their developed-world peers have been much the same. When the initial Covid shock of 2020 hit, they cut interest rates and injected liquidity. And when it became clear that a subsequent bout of inflation would not go away on its own, they implemented the most aggressive tightening campaigns in decades to combat it.
Even just over a year ago, monetary chiefs were on the same page at the ECB’s annual meeting in Sintra, Portugal — in seeing more work to be done to rein in inflation. “We have common shocks” that “affect us all,” Bank of England Governor Andrew Bailey said at the time.
Today, with inflation falling but remaining above the 2% target, there is more divergence in the group as policymakers weigh the risk of price pressures remaining too high against the danger of pushing their economies into recession. For investors, that creates a more volatile outlook.
While the ECB cut its benchmark rate more than two months ago, the Fed has yet to pull the trigger. The BOE acted on Aug. 1, but only by a close 5-4 vote in its policy-setting panel. The head of Australia’s central bank this month cited critics on both sides of the rate debate, with some advocating tightening and others calling for easing.
Fed Chairman Jerome Powell, who will speak Friday at a symposium in Jackson Hole, Wyoming, hosted by the Kansas City Fed, said last month that “analysts have been continually surprised.”
This year’s theme for the conference is “reassessing” the effectiveness of monetary policy and how it filters down to the broader economy. The gathering typically sees major central banks represented at senior levels and helps shape investor expectations.
With mixed signals from the U.S. economy — July’s jobs report was much weaker than economists had forecast, but monthly sales outperformed — the judgment on when to ease and when becomes even more challenging. And that’s reflected in futures markets in the run-up to Jackson Hole.
In the wake of July’s jobs report, which showed an unexpected jump in the unemployment rate and a drop in stocks, traders have begun betting on a 50 basis point cut at the Fed’s September meeting, if not sooner. Futures now suggest a smaller move of 25 basis points is more likely.
An extreme example of the uncertainty facing central bankers at this stage of the economic cycle emerged in New Zealand last week. The Reserve Bank of New Zealand (RBNZ) shocked observers by cutting rates, after signalling three months earlier that such a step would not happen until well into next year.
The RBNZ episode came a week after Japanese central bankers had to quickly recalibrate their message.
The Bank of Japan surprised some observers on July 31 by raising its benchmark rate by 15 basis points and including forward guidance in its policy statement telegraphing more hikes to come. On Aug. 7, after stocks fell and the yen rose, the BOJ sent a strong dovish signal by promising to refrain from hikes when markets were choppy.
In Europe, central bankers are facing a dilemma, with recent price data showing a surprise rise in euro zone inflation to 2.6%, along with indications that the economy is doing worse than expected. Officials expect inflation to reach their 2% target by the end of 2025, but have consistently stressed a high level of uncertainty.
This month’s split vote at the BOE’s Monetary Policy Committee saw Bailey, the central bank governor, at odds with his own chief economist, Huw Pill, who voted against cutting rates. Bailey said after the August meeting that rate setters were uncertain about which of several possible scenarios the economy might take, and had different views on their likelihood.
Uncertainty may be the one thing all central bankers agree on.
2024-08-20 20:51:59