When Andrew Bailey delivers his keynote address to fellow central bankers later this week he will have to imagine he is in a Wyoming ski resort rather than his office in London’s Threadneedle Street. Jerome Powell, the chairman of the US Federal Reserve, will not need to fly 2,000 miles west from Washington DC to provide his views about inflation.
This is the new-look Jackson Hole, the annual conclave of monetary policymakers and economists that gets under way on Thursday and that since 1982 has taken place in a ski resort in the Grand Tetons. Davos for central bankers is a virtual affair this year.
Despite that, the speeches will be crafted with great care. Bailey’s was still being fine-tuned this week because while central bankers are keen to impress each other they also know that – virtual or not – the financial markets are watching.
Bailey’s wife comes from Idaho and he takes his summer holidays in the north-western US state. Before Covid-19 he had worked out the logistics of driving across into neighbouring Wyoming for a brief visit to Jackson Hole. The coronavirus crisis put paid to that idea, as it has to the forecasts made by Threadneedle Street’s monetary policy committee before the pandemic arrived in the UK.
The Bank’s monetary policy committee responded by cutting interest rates to 0.1% and by pumping £200bn into the economy through its asset-purchase scheme.
When Bailey speaks on Friday he is unlikely to provide too many clues as to what the Bank will do in the short-term with interest rates or the money creation scheme. Instead, the cerebral nature of the symposium will give him the chance – six months into the job – to give his first individual reflection on the lessons for central banks from a Covid-19 world.
Since the start of the year, the Bank has been looking into the medium and long-term effects of operating in a world where it is hard to cut interest rates any further and whether laws of diminishing return apply to doses of quantitative easing. A working paper with the Bank’s conclusions will be published alongside Bailey’s speech.
Powell’s speech will be more market-sensitive because he is expected to signal that the Fed is poised to soften its inflation stance, paving the way for more stimulus in the months ahead. If the head of the world’s most powerful central bank fails to deliver, share prices are likely to nosedive.
With a presidential election coming up, Powell is unlikely to disappoint.
Paul Ashworth, a US economist at Capital Economics, said: “The Fed is very close to introducing changes to its policy framework that would explicitly allow for an overshoot of the inflation target to compensate for the undershoot over the past decade. Those changes to the long-run goals and strategy statement, which are likely to be discussed by chair Jerome Powell in his Jackson Hole speech on Thursday and incorporated at the next Federal open market committee meeting in mid-September, will probably pave the way for the introduction of additional monetary stimulus, albeit possibly not until later this year.”
Krishna Guha, an economist at the US research firm Evercore, agreed, saying: “Heading into Jackson Hole we are confident chair Powell will use his speech Thursday to tee up a profoundly consequential and risk-friendly move to soft inflation averaging at the Fed’s upcoming September meeting.”
Times have certainly changed. Back in 1982 nobody expected the chairman of the Fed, Paul Volcker, to be soft on inflation. On the contrary, Powell’s legendary predecessor used painfully high interest rates to squeeze inflation out of the US system.
The story goes that Jackson Hole was originally chosen as a venue because the organisers – the Reserve Bank of Kansas – knew the event needed Volcker, and the way to get him to leave Washington was by promising some of the best fishing the US has to offer.
Since then, the annual get-together has reflected the state of the global economy: the long boom of the 1990s; the unheeded 2005 warning from Raghuram Rajan, the then head of the International Monetary Fund’s economics department, that there was risk of a “catastrophic meltdown”; the inquests in 2009-11 into what had gone wrong. By 2014, Mario Draghi, the then president of the European Central Bank, was making the case for greater use of fiscal policy – tax and spending – alongside monetary policy.
That proved to be a good call. In the global financial crisis of 2008-09, monetary policy did almost all the heavy lifting. This time, finance ministers have provided more of the stimulus, with the active backing of the central banking community. The official title of this year’s Jackson Hole conference is navigating the decade ahead: implications for monetary policy. Or, put another way, have central banks the tools they need to cope with the second major crisis in the global economy in little more than a decade?