|
 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. (http://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.
[to top of second column] |
This, in fact, goes beyond Jackson Hole. A study by economists at
the New York Federal Reserve (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1923197)
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 http://blogs.reuters.com/james-saft)
(Editing by James Dalgleish)
[© 2014 Thomson Reuters. All rights
reserved.] Copyright
2014 Reuters. All rights reserved. This material may not be
published, broadcast, rewritten or redistributed. |
