Powell affirmed the Fed will ‘keep at it’ on inflation, but what else happened at Jackson Hole? In the weekly, we pull out some of the key insights, including on the outlook for government debt and the ‘friendshoring’ dynamic.
Jackson Hole is a three-day international central bank talkfest dating back to 1981, with its location a nod to US Fed Chair Volker for its proximity to fly fishing. This year’s conference was on “Structural Shifts in the Global Economy”. While no major central bank policy announcements were made, there were a few interesting themes relevant to markets which we explore in this week’s Weekly.
Theme 1: The US Fed will “keep at it until the job is done” on price stability. This again echoes Volcker’s autobiography of “Keeping at it”. With policy in restrictive territory, the Fed will be balancing doing too little vs. doing too much. The Fed still assesses that getting inflation back sustainably to 2% will require a period of below-trend growth and some softening in labour market conditions. Higher for longer remains the theme, but we caution that if there are more favourable CPI prints then it could be productivity is picking up – an echo of 1996 under Greenspan.
Theme 2: Inflation targets are unlikely to change, despite calls by some academic economists. Both US Fed Chair Powell and ECB President Lagarde highlighted the importance of returning inflation to 2%. President Lagarde went further and said that in an environment of possible structural shifts, central banks need to be clear about their targets and have an unwavering commitment to deliver so inflation expectations are anchored and monetary policy itself does not create uncertainty.
Theme 3: Many potential structural changes in the global economy were highlighted. Of importance for markets were: (a) labour markets remaining tight; (b) the pandemic accelerating digitisation; (c) the energy transition leading to higher structural investment needs led by the public sector, as well as disruptions from climate change; and (d) geopolitical fragmentation leading to greater ‘friendshoring’. Given these forces, supply side shocks could become more common and generate large relative price shocks. The task of central banks will be to keep inflation expectations anchored while these relative price changes play out.
Theme 4: Two interesting papers highlighted that government debt levels are likely to remain high and Italy appears vulnerable given a lot of its net issuance was soaked up by the ECB, while on trade friendshoring is inflationary, though China is not being cut out of trade with China’s linkages to Mexico and Vietnam also growing.