(BFM Bourse) – As every summer since 1982, the world’s big money-makers are preparing to meet in the heart of an isolated town in Wyoming, Jackson Hole, from where they could announce important decisions in terms of monetary policy. But how did this symposium become a benchmark? And what can we expect from this 2019 vintage?
Organized by the Kansas City Fed, the annual Jackson Hole conference brings together central bankers from around the world every summer in a valley 2,000 meters above sea level deep in Wyoming. The president of the powerful American monetary institution, Jerome Powell, is expected there with a firm footing, investors needing clarity in the face of fears that are mounting on the global economy.
Jackson Hole, a good spot for … fly fishing
Before analyzing the ins and outs of this 2019 vintage, let’s briefly go back to the genesis of this symposium. In the late 1970s, the Kansas City Federal Reserve – one of the Fed’s twelve regional banks – decided to hold an annual conference to discuss current economic issues. After surveying several sites, including the popular ski resort of Vail in Colorado, the regional bank decides to change its strategy in order to attract a heavyweight in the financial sector in the person of Paul Volcker, president of the 1979 Fed. to 1987.
In a book devoted to the history of the event, former research director and Kansas City Fed vice president Tom Davis, who was also in charge of organizing the conference, tells how the choice fell on Jackson Hole. “We first thought of Santa Fe (New Mexico) to attract big names in finance in the summer, then we looked for other potential sites in Colorado.” This is where Paul Volcker’s passion for fly fishing came into play. Knowing that the mere presence of the Fed chairman would be enough to attract other heavyweights in the global economy and ensure the event’s success, Tom Davis sets out in search of a spot full of fish in Colorado. An expert explains to him that the water will be too hot there in August and advises him to go further north. Jackson Hole, a valley that rises to 2,000 meters above sea level in Wyoming, ticks all the boxes. Paul Volcker bites on the hook and responds.
Unlike the Davos Economic Forum which has been held every winter since 1971 in an upscale resort in the Swiss canton of Graubünden, the Jackson Hole annual conference brings together only handpicked economists, the capacity of its main meeting room. conference being limited to … 150 seats. If the founder of Davos, the professor of economics Klaus Schwab, likes to bring in celebrities like singer Bono or actress Sharon Stone, we prefer to stay between serious people in Wyoming. Business leaders and politicians are not welcome there either.
2005, 2007, 2010, outstanding editions
Beginning with the 1982 Symposium, the Jackson Hole Annual Conference continued to expand and gain in fame. Among the vintages that have remained in the annals, that of 2005 was marked by the intervention of a certain Raghuram Rajan, professor of finance at the University of Chicago who had also become, two years earlier, the youngest research director of the IMF. The Indian economist then warned central bankers against the growing risks carried by the financial system and proposed policies to reduce these risks. His study, titled “Has financial development made the world riskier?” will earn him sharp criticism from the former US Secretary of State for the Treasury Lawrence Summers for whom these warnings would show bad judgment and would be “reactionary” for having dared to question the monetary policy led by Alan Greenspan . “Larry” Summers went so far as to call the man who has since become governor of India’s central bank a “Luddite”, named after the workers who opposed machinery in England in the early 19th century.
The economic crisis of 2008 however confirmed the views of Raghuram Rajan, and the Wall Street Journal recognized in an article which remained famous in January 2009, the premonitory nature of his intervention.
Two years later, “in the midst of the subprime crisis, the meeting of August 31, 2007 will have marked the reputation of the Jackson Hole symposium” report experts from Mirabaud Securities Geneva. “Indeed, by clearly signaling that” The Federal Reserve stands ready to take additional measures, as needed, to provide liquidity and promote the smooth functioning of the markets “, Ben Bernanke [président de la Fed à l’époque] will kick off a cycle of almost unprecedented rate cuts as they will drop from 5.25% on September 18 (i.e. the Fed meeting that will follow Jackson Hole) to … 0.25% in December 2008 “, recalls Mirabaud Securities.
Voted Personality of the Year by Time magazine in 2009 for having, according to the monthly, “saved the United States from financial disaster”, Ben Bernanke also marked the 2010 symposium by paving the way for the launch of a second program asset buyback (QE).
What to expect from the 2019 vintage?
“The Jackson Hole symposium is timely this year,” says Mirabaud. Indeed, they explain, “in full doubt about global growth and in full confusion about a forthcoming recession, central banks must absolutely provide answers to investors a few weeks before their next meetings already considered crucial.” A year after asserting that Fed members believed the gradual process of rate hikes remained appropriate, Jerome Powell will have the heavy task of reassuring markets on Friday, after making the first rate cut in ten years in July. -Atlantic.
This year’s theme – “the challenges of monetary policy” – is very topical, as “different economic strengths have led central banks to chart different paths” and “the different trajectories of the economy. monetary policy across countries in recent years have contributed to a divergence in interest rates, “note analysts at Mirabaud. These different trajectories have also had repercussions on exchange rates and trade, and therefore on global economic activity. In addition, “the inversion of the yield curve [des rendements obligataires américains, ndlr] sowed turmoil in the minds of investors, “adds Mirabaud.
While there is little doubt about the accommodating nature of “Jay” Powell’s intervention on Friday, it is the scale of the upcoming rate cuts that are worrying investors. Since early August, markets have been assigning an implied probability of 100% in favor of a rate cut at the September meeting, with a probability ranging between 20 and 40% for a 50 basis point cut, with the majority betting however rather on 25 points.
The surprise could come from the ECB
If the investors will undoubtedly scrutinize the speech of the boss of the Fed, the experts of Mirabaud judge that “the surprise could nevertheless come from the European officials”. The governor of the Central Bank of Finland Olli Rehn indeed took the lead last Thursday by declaring that the ECB would announce, in September, a package of stimulus measures which should exceed investors’ expectations. In an interview with the Wall Street Journal, the Finnish economist said that “the slowdown in the global economy would lead the ECB to put in place new stimulus measures which should include substantial and sufficient bond purchases, as well as key rate cuts “.
“When you operate in the financial markets, it is often better to do too much than not enough, and it is better to have a very solid set of policy measures rather than to tinker around” he added, saying by elsewhere that the ECB could also ease the conditions for new long-term refinancing operations for banks, lowering their interest rates or extending their maturity. ”Currently, the consensus expects the European monetary institution announces a 0.1% reduction in its deposit interest rate (to -0.4% today) as well as around € 50 billion per month in bond purchases as part of its QE. “Any statement in this direction should restore confidence to investors” conclude the experts of Mirabaud.
Quentin Soubranne – ©2020 BFM Bourse
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