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The View | Why Jackson Hole is chance for central banks to look beyond horizon
- The ability of central banks to pursue their main goals will depend increasingly on pursuing reforms in how they think and function
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Central bankers gathering soon at Jackson Hole, Wyoming will focus on piloting a “soft landing”, but they need to give more attention to how both their roles and tools must evolve amid the frenzy around artificial intelligence (AI), the pressing need for digital currencies to streamline transactions and mounting disputes over how trajectories of monetary policy should be communicated.
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Investors will be keenly focused on whether the keynote speech of US Federal Reserve Chair Jerome Powell indicates the pace and scale of the central bank’s pivot towards lowering interest rates after increasing the benchmark 11 times between March 2022 and July 2023 before pausing at a range of 5.25 to 5.5 per cent, the highest in 23 years. Analysts largely believe a 50-basis-point cut will come as early as September 18 followed by at least one more before year-end, according to a FactSet survey of economists.
It’s rare that remarks at Jackson Hole by a Fed chair roil markets. The S&P 500 index inched up an average of 0.3 per cent in the month after the symposium took place each year between 1978 and 2022, according to Dow Jones data. But that index plummeted 3 per cent in one day in 2022 when Powell warned that the United States “will likely require maintaining a restrictive policy stance for some time”, a move that will “bring some pain”.
What Powell says this time will again raise concerns about how the Fed communicates monetary policy, especially through the Summary of Economic Projections and the flurry of speeches by Fed governors before the quiet period preceding the rate-setting Federal Open Market Committee meetings.
Begun in 2012, the “dot plot” graphs in the quarterly summary show anonymously each committee member’s expectations for the appropriate Fed funds rate in the next few years, as well as forecasts for unemployment, GDP and inflation. While they might be a good signal on some occasions, at other times the early warnings might not represent the Fed’s intent, fuelling confusion and unintended volatility in markets.
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Further, critics say the governors’ forecasts underscore that the Fed’s crystal ball isn’t better than anyone else’s.
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