Warning Shots in the Dark
- Uncertainty and volatility may prevail, but the “Jackson Hole 2022 spirit” is crystal clear: risks can’t be taken with persistent inflation and more tightening is needed. 2023 may be a different story though.
We found it striking that a lot of discussions in Jackson Hole focused on the inordinate level of uncertainty central banks are facing right now while the policy conclusions – “keeping at it” on the monetary tightening – were crystal-clear. This reflects the profound change in how central banks view the distribution of risks. With higher probability of inflation turning persistent, they feel compelled to act forcefully, even if the macro environment is unusually volatile. This is the symmetric approach to what prevailed during the “great moderation” when it is the deflation risk which was calling for decisive accommodative action.
The dataflow is getting more ambiguous though – in the US at least. Beyond the good news from the July consumer inflation print, import prices are now falling. Yet, the Fed remains focused on the labor market, and with wages still accelerating, Powell’s hawkish tone is justified. The prominence of the 1970s/1980s period in the Jackson Hole debates suggests the Fed is concerned about making a policy mistake. There may also be a message to the US government. After all, it’s the excess fiscal stimulus of 2020-2021 which explains a lot of the current core inflation shock, and the central bank may be tired of being accused of having failed to address the acceleration in consumer prices. The “original sin” of the 1970s Fed was in its failure to resist government pressure to accommodate its spendthrift proclivities. Now, if the labor market starts struggling decisively, the shelf-life of the 2022 “Jackson Hole spirit” may not be that long. But there is always some inertia in the policy stance. Even if the dataflow deteriorates, the Fed will continue hiking for the remainder of this year, and as we argued before the August break, the market was too impatient in pricing in a dovish pivot.
The ECB-speak at Jackson Hole was also on the hawkish side. Still, we detect quite some differences in the analysis of Isabel Schnabel and Francois Villeroy de Galhau. This may not matter much before 2023 though. For now, hawks and doves are united on the need to bring policy rates back to neutral territory.