Can Fed chief dig himself out of a (Jackson) Hole?
22 August 2019
Jerome Powell may be "clueless" according to US President Donald Trump. But when the Federal Reserve head takes centre stage at a gathering of the banking elite this weekend there'll be plenty of people watching for his clues on restoring global economic balance. It's the annual symposium of central bankers from around the world, held in the picturesque Wyoming mountain village of Jackson Hole. Mr Powell's keynote speech is the much-anticipated highlight. According to Sarah House, senior economist at Wells Fargo Securities: "The whole point [of Jackson Hole] is to get away, take a step back from what we are currently seeing in the economy, and talk about some of the longer term issues." But will Mr Powell have that luxury? Such is the anxiety gripping financial markets, there's an expectation he needs to address immediate issues: interest rate direction, conflicting signals on Wall Street, the China trade row, stimulus, perhaps even Mr Trump's constant sniping. Mr Powell faces a balancing act: Calm jittery financial markets without antagonising further a hostile president who only this week called him a "golfer who can't putt". Many think it's a no-win situation. For Ms House, it's not even as if the US economy is in particularly bad shape. She told the BBC that Mr Trump perhaps has a point when he insists in his Twitter outpourings that the economy is in rude health. She said: "The consumer sector is very strong right now. The labour market is hot - we've got close to the lowest unemployment rate in about 50 years... Savings rates are quite high." Should the economy turn sour, "there's a lot of cushion to fall back on". It's in China and Europe, specifically Germany, where many of the big economic problems lay, she said. And yet, there are fears the US economy, which has expanded each year for more than a decade, is at risk of stalling - perhaps even tipping into recession. Such is Wall Street's unease that share markets plunged 3% one day last week, only to recover almost as quickly. But it is in the bond markets - basically, the area that deals with loans to governments and companies - where recession signals have been flashing brightest. This month it became more expensive for the US government to borrow money over two years than 10. Usually, investors want a higher rate of return for locking up money for 10 years - compensation for unforeseeable risks. When the reverse is the case - a so-called bond yield inversion - it suggests investors think the short-term economic picture is gloomy. What's more, an inversion has proved a reliable (though by no means conclusive) indicator that recession is on its way. The president has dismissed recession warnings. Yet on Tuesday, he touted tax cuts to boost the economy - only to dismiss the idea on Wednesday. Many asked, if Mr Trump thinks the economy is in good health, why contemplate a tax stimulus? There is, then, a mass of conflicting signals that analysts would like Mr Powell to cut through and clear up. As Russ Mould, investment director at AJ Bell points out, when the jobs and consumer markets are healthy, you would normally expect pressure for interest rate rises, not cuts. It's "just a little odd", he told the BBC. Minutes released this week from the last Fed meeting, in July, underlined the confusion. Rates were cut 25 basis points, but the minutes show some policymakers wanted to go further, while others were against a cut. At the very least, the Jackson Hole elite should "send a signal to markets that they are attuned to the risks and at least doing what they can", Mr Mould said. A big problem for the Fed chief, however, is that Mr Trump has painted him as an economic threat, and few people have come to the central banker's support. Populists side with the president, while Democrats and progressives think the Fed is just out to protect Wall Street and don't want to be seen as defenders. Karen Petrou, managing partner of Federal Financial Analytics, says Mr Trump has set up Mr Powell for blame if, or when, things go wrong. For all the president's contradictions, he's a master of political reality, she says. "Mr Trump doesn't care what rates are. He cares about who voters think is to blame for slower growth and market turmoil, and he is determined to be sure it isn't him," she said. "What's an astute politician to do? Find a fall guy distrusted by Republicans, Democrats, independents, populists, and progressives." Some experts think it's time Mr Powell gave a more forceful response to pressure coming from the White House. Central bankers have emerged from the shadows since the global financial crisis, to be seen as economic saviours with a more powerful public voice. Joseph Song, senior economist at Bank of America, thinks Mr Powell and other Fed policymakers will at the very least defend the Fed's independence. "They are going to try to hammer home that message again and again, and make sure that they preserve their independence," he told the BBC. But the Fed's task is pretty straightforward (if difficult): keep the labour market strong without causing inflation. It means the central bank alone cannot deliver what Mr Trump ultimately wants - sustained economic growth and financial stability - and Mr Powell should perhaps stand up and say so, says Mohamed El-Erian, former head of bond trading giant Pimco. But, as Mr El-Erian wrote this week in an article for Bloomberg, any push back against the president "risks fuelling immediate market instability and aggravating White House anger". Perhaps it would be better to say nothing at all, he ponders. "No wonder a growing number of observers wonder whether central banks should revisit the mantra that more communication and policy transparency are always better - a traditional wisdom that led Powell to increase the frequency of press conferences," he said. But after all the expectation, if the Fed chief does opt for diplomacy and prudence, it could end up making Jackson Hole something an anti-climax.
"Mr Trump doesn't care what rates are. He cares about who voters think is to blame for slower growth and market turmoil, and he is determined to be sure it isn't him," she said. "What's an astute politician to do? Find a fall guy distrusted by Republicans, Democrats, independents, populists, and progressives." Some experts think it's time Mr Powell gave a more forceful response to pressure coming from the White House. Central bankers have emerged from the shadows since the global financial crisis, to be seen as economic saviours with a more powerful public voice. Joseph Song, senior economist at Bank of America, thinks Mr Powell and other Fed policymakers will at the very least defend the Fed's independence. "They are going to try to hammer home that message again and again, and make sure that they preserve their independence," he told the BBC. But the Fed's task is pretty straightforward (if difficult): keep the labour market strong without causing inflation. It means the central bank alone cannot deliver what Mr Trump ultimately wants - sustained economic growth and financial stability - and Mr Powell should perhaps stand up and say so, says Mohamed El-Erian, former head of bond trading giant Pimco. But, as Mr El-Erian wrote this week in an article for Bloomberg, any push back against the president "risks fuelling immediate market instability and aggravating White House anger". Perhaps it would be better to say nothing at all, he ponders. "No wonder a growing number of observers wonder whether central banks should revisit the mantra that more communication and policy transparency are always better - a traditional wisdom that led Powell to increase the frequency of press conferences," he said. But after all the expectation, if the Fed chief does opt for diplomacy and prudence, it could end up making Jackson Hole something an anti-climax.
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Anti-climax?