Opinion

James Saft

The problem with Jackson Hole: James Saft

August 19, 2014

Aug 19 (Reuters) – There was a time, and I admit I miss it,
when the August Jackson Hole conference of central bankers got
about as much mainstream attention as a particularly
well-attended chess match.

Those were the good old days, before financialization,
economic crisis and political paralysis gave monetary policy an
arguably too central role in the economy and the allocation of
capital.

This week when central bankers from around the world meet at
the Kansas City Federal Reserve’s conclave at Jackson Hole,
Wyoming, investors and many other people who ought to have
better things to do will pay avid interest to the proceedings.

While the Kansas City Fed’s conference has been held every
August since 1978 a quick check of Google shows the world only
showed small interest in it until 2006. (www.google.com/trends/explore#q=%22jackson%20hole%22%20%22federal%20reserve%22)
That, of course, was the last year before the financial crisis
took hold, since when there has been an annual spike in stories
detailing what Jackson Hole participants may say, what they
actually did say, and how much markets went up after they said
it.

This is a trend which exists for good reason, but with
malign underpinnings.

The good reason is that, of course, the economy needed
rescuing, and of course, central banks had to play a central
role in that, something which increased their power and
influence within the economy. The less positive side of this is
that, at least in the U.S., an active central bank has for
several years partly filled a void created by legislative and
executive branches unable to agree on a policy.

The irony is that, by many measures, this hasn’t worked very
well, with an extended though halting and feeble recovery which
has backed central bankers into a corner, leaving no leeway to
actually raise interest rates.

In fact the overwhelming consensus, going into the 8th
Jackson Hole meeting of the financial crisis era, is that Fed
Chair Janet Yellen, faced with some weak economic data at home
and what looks like an incipient recession in Europe, will
deliver there a dovish message, implying that rate increases are
not coming soon.

So solid is the expectation that Yellen will reassure
financial markets that Steven Englander, foreign exchange
analyst at Citigroup, divides his three scenarios for her speech
between “full dovish”, “semi-dovish” and “contingent dovish”.

OF FED DAYS AND HOLIDAYS

Each of the past seven Jackson Hole conferences has led to a
stock market rally, with often substantial gains after the
announcement or flagging of some new twist in the attempts to
revive the economy by cutting the price of borrowing and raising
the price of assets.

That, in itself, explains the interest. Everyone loves
getting richer, if only illusorily, and so they like to listen
to what central bankers have to say. While the stock market has
had various stories to propel it in recent years, social media
stocks a notable one, the real support has come from monetary
policy.

This, in fact, goes beyond Jackson Hole. A study by
economists at the New York Federal Reserve (here)
found that since 1994 a striking 80 percent of excess stock
market returns in the U.S. came in just the 24-hour periods
before Federal Reserve interest rate announcements. That’s
because during the Alan Greenspan era the Fed provided succor to
the market when the economy was in trouble, while looking the
other way when bubbles like the subprime or dotcom were
inflating.

Under Ben Bernanke and Yellen there has only been a weak
economy to support, but the flow of stimulus has been
relentlessly one way. This year will be no different, and unless
we get an unexpected pick-up in the economy soon, the next U.S.
recession will arrive with no room to cut rates.

The broader issue here is that the use of asset inflation as
the go-to tool to fix the economy has conditioned investors to
pay inordinate interest to monetary policy, which ideally should
be a fine-tuning tool for the economy rather than something like
an engine of growth.

And, as some central bankers themselves might agree, there
are good reasons to regret the centrality of monetary policy. A
generation of investors and business people has learned to
allocate capital under these conditions and the results have not
been encouraging.

The real question is whether that centrality is situational
or something more permanent. Will there ever again come a time
when equity markets don’t outperform just before the secular
Christmas of Jackson Hole or Federal Open Market Committee
meetings?

That is a question that will probably not be discussed and
certainly not answered at Jackson Hole.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by James Dalgleish)

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