William John Market Report 31-08-21
William John assesses the 2021 Jackson Hole economic symposium
William John, Monetary Policy, Central Bank, Jackson Hole, Quantitative Easing, Interest Rates, Employment

William John Market Report 31-08-21

William John Market Report 31-08-21

Category: Reports

Jackson Hole, a skiing valley in the state of Wyoming and home to many areas of outstanding natural beauty, has become a symbol of post-pandemic Western capitalism. The Jackson Hole Economic Symposium is a meeting of “economists, financial market participants, academics, U.S. government representatives and news media to discuss long-term policy issues of mutual concern” and its 2021 edition took place on Friday, 27/08.

Given recent economic circumstances over the past 18 months, it is no surprise that investors have been paying close attention to the summit and more importantly what minutes were taken at the symposium. In particular, the meeting was headlined with a speech by Federal Reserve Chairman Jay Powell. In the speech, he remarked on the Fed’s key targets for relaxing its asset purchasing programme. The programme, part of a wider quantitative easing initiative, provides trading liquidity in key financial markets, such as the U.S. Treasury Bond markets. Along with historically low interest rates, asset purchasing by Central Banks keeps the cost of borrowing for businesses manageable – ensuring businesses that utilise America’s capital markets could finance their businesses throughout the pandemic business cycle at attractive rates. 

The Federal Reserve’s key targets for tapering its asset purchasing programme include an average of 2 per cent inflation per year and maximum employment. Inflation over the past year has been accelerating at an unprecedented rate:

Source: William John Analytics, tradingeconomics.com

In the Federal Open Market Committee (FOMC) July meeting minutes, it was noted that the majority of Central Bankers at the meeting were keen to begin tapering asset purchases to restrain mounting inflationary pressures (as seen in the graph above) and ensure the financial markets didn’t become a playground for speculative asset bubbles in such accommodating economic circumstances for investors. 

Moreover, some commentators have noted that substantial rises in consumer prices, that have been passed on from global supply chain bottlenecks, are only going to sustain the current high inflation rate for a longer period than the Reserve expects. Chairman Powell settled these fears stating “If excessive inflationary pressures were to build or inflation expectations were to ratchet above levels consistent with our goal, we would not hesitate to act” according to the Financial Times. 

On the key inflation target, Chairman Powell disclosed that the Federal Reserve was on track to taper its asset purchases either as early as December 2021 or as late as the second half of 2022, depending on how inflation data unfolds over the coming months. Nevertheless, Chairman Powell stressed that a reduction in asset purchases would not lead to quantitative tightening, that is, a sell off of the Federal Reserve’s holdings in securities and a rise in the interest rate. This separation between one cautionary policy move and a complete reversal in the Reserve’s agenda gives the Reserve flexibility for the rest of the year and prompted a moderate yet measured response from investors with the S&P 500 up 0.88% at close on 27/08. 

Another target that Chairman Powell remarked upon in his speech at Jackson Hole was the current level of employment in the U.S. economy. He states that there was “clear progress” on maximum employment in the economy. Achieving the Reserve’s employment goals has been seen as a crucial benchmark for its monetary policy stance. This is because increasing employment, and allowing for inflation-driven wage rises, can fuel rapid economic recovery by boosting aggregate demand in the economy. The Reserve’s current position seems to indicate that whilst inflation is unusually high, these are unusual times and as long as it does not diverge from the 2% average annual target, it is something the Reserve can manage in order to focus on getting to maximum employment with healthy wage levels. U.S. job growth over the past few months has radically improved, based on non-farm payrolls since October 2020:

Source: William John Analytics, tradingeconomics.com

Given this data, inflation appears manageable according to the rhetoric at Jackson Hole and current monetary policy, whilst fuelling inflation, is supporting employment and boosting jobs which will ultimately propel the U.S. economy forward. If current trends continue, the U.S. economy is likely to be robust enough in mid-2022 for the Federal Reserve to commit to a definite reversal in its current policy agenda. For now though, it is business as usual. 

Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.