Business World

Monday 23 April 2018

Draghi's appearance at Jackson Hole has potential to upset the markets

The silhouette of people standing in front of a window in the lobby area of the Jackson Lake Lodge during last year’s Jackson Hole economic symposium. Photo: Bloomberg
The silhouette of people standing in front of a window in the lobby area of the Jackson Lake Lodge during last year’s Jackson Hole economic symposium. Photo: Bloomberg

Jamie McGeever

It is perhaps fitting that the biggest annual gathering of central banking's great and good takes place at a fishing retreat: financial markets are angling for the slightest hint on where monetary policy is headed.

The Kansas City Federal Reserve's annual economic policy symposium - attended by finance officials, policy experts and academics from around the world - was first held at in Jackson Hole, Wyoming, in 1982 reportedly at the behest of keen fly-fisher and then Fed chief Paul Volcker.

This year's jamboree will take place on August 24-26, and once again investors will be on tenterhooks. But it wasn't always like this and many argue central banks would do better to revert to quieter days. Since the global crisis of 2007-09 markets have become so hooked on central banks' "forward guidance" that they are now barely able to work it out for themselves. Indeed, what was initially forward guidance has now become "over guidance".

Almost every central banker has extolled the virtue of verbal guidance to varying degrees, including Ben Bernanke, Mark Carney, Haruhiko Kuroda and Mario Draghi. Fearful that silence will lead to greater market volatility, constant signalling has become endemic.

Witness the scramble in June to clarify European Central Bank president Draghi's remarks at the ECB policy forum in Sintra, Portugal, which is fast becoming the European equivalent of Jackson Hole.

His speech on June 27 opened the door to tweaks in the bank's aggressive stimulus policy, and investors moved to price in an announcement as soon as September that QE would be reduced. Germany's 10-year bond yield had its biggest rise since December 2015, and the euro its biggest jump in a year.

But the next day, sources familiar with Mr Draghi's thinking said financial markets had misinterpreted him. The speech was full of caveats, implying that the ECB is still ready to ease policy if a stronger euro or higher yields end up tightening financial conditions.

According to one former central banker who has attended Jackson Hole, Sintra was a communications "fiasco" for Mr Draghi, and showed exactly why central bankers should refrain from "open mouth operations".

It was the latest example of "unwise" speeches from central bankers aimed at feeding the growing appetite in markets for statements that anticipate future policy actions, particularly at set-piece events like Jackson Hole or Sintra, he said.

"Markets make a living doing Kremlinology, looking for a comma, a sneeze, or a hiccough as policy guidance. Saying less is more. He who communicates least communicates best."

According to the Kansas Fed, Jackson Hole is where participants discuss "the economic issues, implications, and policy options pertaining to the symposium topic. The symposium proceedings include papers, commentary, and discussion".

Steering financial markets' expectations surrounding upcoming policy decisions isn't on the table. Or at least, it wasn't during Volcker's chairmanship of the Fed and that of his successor Alan Greenspan.

Then, Jackson Hole was more about the conceptual, technical and theoretical elements of central banking. But there was a shift of emphasis under Greenspan's successor Ben Bernanke following the global financial crisis.

Mr Bernanke used his Jackson Hole address in 2010 to open the door to a second round of massive bond buying. His speech on "The Economic Outlook and Monetary Policy" on August 27 that year ran to more than 5,000 words, nearly 2,000 of them specifically on "Policy Options for Further Easing".

The S&P 500 traded as low as 1039.70 that day, but Mr Bernanke's guidance that more bond-buying stimulus was coming boosted investors' risk appetite, and it never looked back. All three main US equity indices have hit record highs this month.

Mr Bernanke's language wasn't quite so stark the following two years, although stocks welcomed his willingness to consider further easing in the face of high unemployment and sluggish growth and inflation.

He missed the 2013 symposium due to a personal diary clash, and it was Mario Draghi who used the 2014 symposium to effectively tell the world that the ECB was about to take the plunge into full-blown quantitative easing. Benchmark 10-year German and US bond yields spiked around 20-30 basis points higher in the following weeks but then resumed their steep, long-term decline in anticipation of the ECB's quantitative easing which has now topped two trillion euro.

Investors are building their hopes up for another Jackson Hole signal from Draghi next week, this time on when and how the ECB will wind down its QE programme. But will he deliver?

"I expect Jackson Hole to be a bunch of guys and gals sitting around the campfire, singing happy songs. There will be very little hard policy actions," quipped the ex-central banker. (Reuters)

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