As investors start to return from their summer holidays, one date in particular will be looming large in their thinking. The seventeenth of September is tipped by many to be the date when the US Federal Reserve will finally start to hike interest rates as a first step on the long road to “normalisation”.
But with inflation still running well below the Fed’s target, little sign of accelerating wage growth, falling commodity prices, emerging market jitters and yet more Greece-related volatility, a hike in 2015, let alone in September, is far from certain.
It has long been the case that every scrap of communication out of the Fed has been exhaustively analysed for any clues on the central bank’s thinking. In the run up to the September meeting, however, every word has taken on an even greater significance.
It is against this backdrop that the great and good of the central banking world gather in Jackson Hole, Wyoming from today for the Federal Reserve Bank of Kansas City’s annual Economic Policy Symposium.
From inauspicious beginnings in the late 1970s, the Jackson Hole Symposium has become a hugely important, market moving event. Starting in 1978, the Kansas City Fed’s annual conference originally focused on agricultural issues and moved from location to location.
To boost the profile of the event, the organisers tried to find a way to encourage then Fed chairman Paul Volcker to attend. Volcker was known to love fly fishing, so in 1982 Jackson Hole, a noted trout fishing destination, was chosen to host the conference. Volcker duly attended and the rest, as they say, is history.
The conference now covers a broad range of topics and, in recent years, has been used to signal a number of major policy shifts. In 2010, Ben Bernanke all but announced that the Fed’s second round of quantitative easing (QE) was going to be launched. In 2011, he heavily trailed a policy known as Operation Twist, which saw the Fed extending the maturity of its bond portfolio.
In 2012, leading monetary theorist Mike Woodford presented a paper which was widely seen as influencing the Fed’s decision to introduce conditional forward guidance and open-ended QE in December 2012. And in 2014, Mario Draghi set the course for the European Central Bank’s own QE policy, which was finally launched in January 2015.
This year’s theme is “Inflation Dynamics and Monetary Policy”. Major talking points will probably include the extent to which recent increases in wages can drive inflation, how much improvement is needed in the labour market before wage growth appears, and whether the central bank’s inflation target of 2 per cent is right.
The Fed has set itself the test of needing to be reasonably confident of inflation returning to its target over the medium term before it hikes rates, so it is not difficult to see how this meeting could have implications for investors everywhere.
However, there are several reasons why any investors hoping for a steer from Jackson Hole over the September decision to raise rates or not are likely to be disappointed.
First, Fed chair Janet Yellen is not attending this year. Her deputy Stanley Fischer will be in her place but, while he is very much respected within the Fed, his views just do not carry as much weight as Yellen’s.
Second, the Fed seems to be getting uncomfortable with Jackson Hole being used to announce policies that move markets so much. The central bank would rather it returned to being a drier, academic conference where central bankers and economists can pontificate in peace.
Finally, the Fed is trying to avoid telegraphing the timing of the first hike too explicitly. It does not want to tie itself down to any particular date because it needs to be able to adjust to new data which comes in.
But even without an explicit steer from Jackson Hole, no one can say they didn’t see a hike coming if it happens. It’s all very different from 1994, when a round of interest rate rises came out of the blue. We know much more about the Fed’s thinking now.
But as the “will they/won’t they” tension builds, it is worth remembering that all we know is what the Fed thinks and not what it’ll do. Jackson Hole is still important but the Fed is going to be very keen not to open a can of worms.