Thoughts on Jackson Hole starting today — [Shun Nakahara's Word of the Day] Updated August 25

What Chairman Powell says and does not say

The International Economic Symposium hosted by the Federal Reserve Bank of Kansas City (commonly known as the Jackson Hole Conference) will be held tonight Japan time, starting the 25th, in Wyoming in the western United States. This conference originally gathered central bank officials and economists at a mountain lodge at the foot of the Rocky Mountains, and was an idyllic and scholarly meeting—at least until 1989. However, when the Fed outlined its directions for monetary policy in 1989, it became the most influential conference. Yet the subject remains scholarly, and this year’s theme is “reassessing constraints on the economy and policy.”

Last year, the conference was criticized as the Jackson Hole fiasco—an almost perfect mistake that accelerated inflation. What Chairman Powell will say, or rather, what he will avoid saying, is easier to understand if we consider what he absolutely must not say.

First, unlike last year’s online format, it will be an in-person conference, and above all else, the failure last year constrains the chair. In other words, he will surely avoid an overly optimistic view of inflation and a optimistic supply and accommodative monetary stance. Conversely, if he offers a more optimistic view of inflation than last year—not fully optimistic, but even a little upbeat—it would be a big surprise for the market. Even if not that far, if he signals a clear end point for future monetary tightening, the market would react positively. That said, given last year’s failure, this possibility is quite low.

The market consensus is that he will speak quite hawkishly. The risk scenario is to push even further and speak even more hawkishly. inflation’s current state shows signs of peaking, but remains too high. The Fed will keep a firm stance toward achieving price stability at 2%. This much is already priced in by the market, and the sharp rise in interest rates has reflected such expectations. Considering longer-term yields, expectations that tightening ends within the year are weakening, while the 2023 rate hikes are being priced in. The crucial point is whether he can signal an end point for tightening above 4%, or even beyond that, which would be a significant negative surprise for the market.

And what investors should watch for is further escalation regarding quantitative tightening (QT). QT has been reducing the roll-off of maturing securities without reinvesting them, but if in the future there is a clear purpose to raise long-term market rates and a so-called outright sale of securities in the market occurs, it would be a substantial surprise. Since the Lehman Brothers crisis, the Fed’s massive purchases have greatly reduced market liquidity, and a policy shift like this could trigger a powerful rise in long-term rates.

Conversely, unless he presents a forecast that far exceeds the market’s hawkish expectations for the end point of hikes, or announces a new tightening measure such as outright selling of holdings, a hawkish stance expected by the market but not too strong may not significantly destabilize the market. “What you see may be what you get,” or Jackson Hole without material for consideration may also be possible.