History can explain some things. Spend even just a little time on the back story of anything in life and you get a much better picture of where you are today.
This week the market is showing it has some memory of the past. The annual Jackson Hole conference takes place this week (8/25-27), and there’s a lot of market anticipation about what will be said there. It’s no wonder, as the current environment — which seems to exist right in the middle of the natural tug-of-war between fighting inflation and sustaining growth — sits on enormous fiscal and monetary debt to reduce.
But before I get too far ahead, let’s go back. What is this conference, you ask?
The Jackson Hole conference, which bears an official name of the Jackson Hole Economic Policy Symposium, was started in 1978 by the Federal Reserve Bank of Kansas City (they didn’t move it to Wyoming until 1982). It’s now one of the longest-standing central banking conferences in the world, bringing together “economists, financial market participants, academics, U.S. government representatives and news media to discuss long-term policy issues of mutual concern.”
What has made it a big deal? In the decades since they started, many of the conferences have become the place where notable groundwork was laid for future policies.
For example, the theme for the 2007 symposium, “Housing, Housing Finance, and Monetary Policy,” was initially seen as irrelevant when announced around the start of the year. But as the date approached, warning signs about the housing market surfaced, with foreclosures (when a bank takes ownership of a home because the mortgage is not paid) and the number of unsold homes rising. By the time participants gathered in August of that year, the US housing market had begun to collapse, making it practically the only topic worth discussing. Stocks fell more than -40% following the conference, from October 2007 to December 2008, stemming from the bursting of the housing bubble.
In 1999, Mark Gertler and then Princeton professor Ben Bernanke presented a paper titled “Monetary Policy and Asset Price Volatility,” which would still be Bernanke’s reference point more than a decade later when he was Fed chair. At 2012’s conference, he outlined major changes in monetary policy, presenting the case for an open-ended increase in the Fed’s balance sheet, which came to be known as QE3 (quantitative easing 3.0).
Even as recently as last year's conference, DJ Powell said inflation was transitory, which kept the markets riding high for a little while longer. Of course, that now seems to be a notion of the past, given how long prices of everything have been elevated.
Fast-forward to this year and it seems like the market's rise over the past month was essentially a declaration of victory over inflation on behalf of the Fed. While I believe the market got ahead of itself (especially because valuations grew expensive relative to history), what’s causing anxiety around the conference now is the worry that Powell will deny any improvement in inflation (aka a reduction of it).
If he does deny it, it would likely send expectations of interest-rate hikes back up to match the levels of mid-June, when sentiment was very down and stock market values were down further.
Yet if his message is a mix between acknowledgement of some improvement but also still some work to do, I think you could see the markets calm.
On the other hand, if the good DJ’s set includes acknowledgment of the dangers of overdoing rate hikes in his speech (presumably turning more of a focus on growth vs. inflation), for example, it’ll likely be considered dovish by the market. And you could see a continuation of the rally we’ve seen in the past month plus.
Personally, I am in camp two — the middle ground. I believe he’ll acknowledge the recent improvement in inflation but add caveats that prices are still too high (because they are).
And as for why Jackson Hole, Wyoming? Well, history can explain that too. The answer is trout (yep). Back in 1982, the Kansas City-based organizers wanted to lure the man who was Fed chair at the time: Paul Volcker. They knew he was really into fly-fishing, which required colder temps, and Wyoming was the most north in their Fed district.
Who said one man can’t change the world?
P.S. I like to refer to Fed Chairman Jerome Powell as a DJ since Fed decisions are like music, bad or good, for the markets, and his Q&A “sets'' are so well attended.
Source: Federal Reserve Bank of Kansas City