Central bankers from around the world will descend on Wyoming for the annual central banking jamboree later this week, with markets looking closely for any signals about the future direction of interest rates.
Last year the discussion focused on the near certain recession that commentators thought would develop in the face of rapidly rising interest rates. This year, however, the outlook seems more sanguine with many advanced economies withstanding the pressure of rising rates.
“Markets seem content to buy into the view that central banks can engineer a return to the ‘Goldilocks’ scenario which has served risk assets so well over the past decade or so, namely modest economic growth, modest inflation and relatively low interest rates,” AJ Bell’s investment director Russ Mould commented.
The topic for discussion is ‘Structural Shifts in the Global Economy’, pointing to the way in which economies have surprised policymakers with their resilience.
This has been particularly true in the US, where growth has beaten expectations in the face of the fastest monetary tightening cycle in recent history. GDP grew by 2.4 per cent in the second quarter, even as consumer spending slowed, thanks to strong business investment.
“The continued resilience of activity growth to the surge in interest rates over the past 18 months will be a key focus,” Andrew Hunter, deputy chief US economist at Capital Economics, said.
The surprisingly strong economic performance has raised hopes that central banks will be able to pull off a so-called soft landing, where inflation returns to target without tipping the economy into recession.
With inflation now falling in many western countries, markets are wondering whether rates will remain elevated for long. Traders will scrutinise every word uttered by Fed chair Jerome Powell for any hints as to where the Fed will send interest rates next.
Currently markets are almost certain rates will be kept constant at the US central bank’s next meeting in September, although there may yet be a hike in November. Looking beyond that, most traders think that the Fed won’t start cutting rates until next year.
Powell’s headline speech will be delivered on Friday morning.
Despite the attention that will be devoted to it, US economists at Deutsche Bank thought it would be unlikely that Powell would send “strong signals about the near-term policy path”.
Hunter also reckoned Powell would strike a “more equivocal tone” than last year, where he delivered a clear speech on the necessity of further rate hikes.
While the Fed looks like it is nearly done with rate hikes, the Bank of England is likely to have to hike rates at least twice more in order to get the UK’s stubborn inflation problem under control.
Headline inflation fell sharply in July, but core inflation continued rising. Services inflation hit record levels.
At the Jackson Hole Symposium, the Bank of England’s Ben Broadbent will be speaking at a panel about economic policy this Saturday.