The annual August summits of the world's top central bankers in Jackson Hole, Wyoming, have a dramatic mountain backdrop, but the conference titles are not exactly works of blockbuster film writers.
“Re-evaluating labour market dynamics” – the topic of this weekend’s symposium – appears deliberately dull. Yet Jackson Hole summits have a habit of capturing the zeitgeist.
Famously, the 2005 summit was meant as an appreciation of Alan Greenspan’s years as US Federal Reserve chairman. In the event, it is remembered for warnings about risks in the financial system from Raghuram Rajan, the IMF’s then-chief economist.
Although academic sounding, this year’s conference subject is of wide significance. Labour market dynamics could determine the pace of monetary policy tightening in the US and UK; the latter may yet lead a rate-hiking cycle.
Signals
With central banks maintaining their mesmerising grip over financial markets, much attention will be paid to any signals out of Jackson Hole. Even six years after
Lehman Brothers
investment bank collapsed, the challenges faced by central banks have not diminished.
Sensitivity is high to a possible turn in the interest rate cycle, which has driven yields to historic lows. A big risk is of fresh disruption as monetary policy makers react to widening divergences in performance between the world’s main economies.
Despite the US's relative robustness, expectations are for more dovishness from Fed chairwoman Janet Yellen, who is expected to see significant slack remaining in the US labour market and no need for early US monetary policy tightening, even as the Fed's "quantitative easing", or asset purchase programme, comes to an end.
But in the private discussions in Jackson Hole, the Fed’s dovishness may not be appreciated by the Bank of Japan and European Central Bank. Both would prefer a more hawkish Fed that led to a stronger dollar.
BoJ governor Haruhiko Kuroda arrives in Jackson Hole amid rising market scepticism about whether his aggressive quantitative easing will successfully drag Japan out of decades of deflation. A further bout of yen weakness would help.
Euro zone battle
Similarly, a weaker euro would help
Mario Draghi
, attending Jackson Hole for the first time as ECB president. He is battling to prevent the euro zone falling into Japanese-style deflation.
With euro zone second-quarter growth data last week showing the region stagnating, the ECB faces market pressure for Fed-style quantitative easing.
Traditionally the ECB disliked discussing “output gaps”, or measures of economic slack. But Draghi happily uses such concepts when discussing ECB monetary policies.
With unemployment still at 11.5 per cent of the labour force, there is plenty of “slack” in the euro zone. But there is widespread scepticism about whether euro zone quantitative easing would work. A further depreciation of Europe’s single currency would offer Draghi an alternative escape route.– (Copyright The Financial Times Limited 2014)
