You can always count on the market to focus on the wrong thing.
In a momentous week for the annals of central bank policymaking, the markets seem infatuated with the failed auction of a zero-coupon bond in Germany and the release of the Fed minutes from the July Federal Open Market Committee (FOMC) meeting.
Of course, both events are important for the markets, but I think the real action for the markets is happening in Wyoming – Jackson Hole, Wyoming to be precise.
The Kansas City Fed-sponsored conclave of all the muckety-mucks in the central banking world starts this Friday.
While it will be a meeting full of all sorts of fantastic academic work – yawn – it is singularly important for the Federal Reserve and thus the US economy.
The symposium provides the members of the Fed with an opportunity to undo a couple of the goals they scored on themselves. I know, I know, own goals cannot be undone. But think of the Jackson Hole meeting as an opportunity for Fed Chair Jay Powell to hold a post-game press conference and justify his team’s missteps.
The Fed has committed some serious policy and communication faux pas and has boxed itself in nicely. And for the sake of the US economy, it needs to a find a way out of that box.
The series of own goals really began in 2018. The Fed, in its Philips-curve-driven doctrinaire thinking, raised policy rates even though the US economy was coming down from its tax-cut sugar high. This took place at a time when the Trump Administration was already talking about winnable trade wars and inflationary pressure was nowhere to be found.
In raising rates, the Fed offered itself up on a platter as a worthwhile target of criticism from the Administration.
To its credit, the Fed pivoted in December 2018 and subsequently cut rates in July 2019.
But, to the utter surprise of all concerned, Powell, in his press conference after the cut, characterized it as a “mid-cycle adjustment.” Really? Other than proving to the world that it is still wedded to an old and ineffectual playbook, what did that accomplish? Did it provide the Fed with more operating flexibility? No. Did it help the Fed win back credibility from the markets? No. The markets actually had a rate rally for the record books. Another own goal scored.
That brings us to the upcoming Jackson Hole meeting.
Some commentators suggest that Powell could potentially push back on the pressure coming from the markets and the President to make further rate cuts. Or, he could say nothing at all. It seems to me both options will further erode the Fed’s credibility and perhaps make its current position even more vulnerable.
Instead, what Powell should do, and I believe will do, is use this opportunity to clarify that the Fed’s future policy posture will likely be driven by domestic economic conditions, which incorporate the global environment of low inflation and the current trade wars. In addition, he can also trot out some of the new research on drivers of the new monetary policymaking that the Fed economists have been working on for some time.
The bottom line is that the Jackson Hole meeting is critically important for the Fed and the markets. It provides the Fed with an opportunity to get itself out of a fix it created. The Fed should, and I believe will, use the opportunity to show more policy flexibility. Anything less would be another missed opportunity — and a path to more irrelevance and “blame them” tweets.
Blog header image: Tenley Thompson / iStockphoto.com
The opinions expressed are those of the author as of August 21, 2019, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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