How to avoid a hard landing of the economy? Between galloping inflation and the specter of recession, central banks are on a crest. After two long years of pandemic and six months following the start of the war in Ukraine, central bankers are to meet Thursday and Friday in the American west, in Jackson Hole. The majestic mountains of Grand Teton (Wyoming) have hosted this meeting every year, under the leadership of the American Central Bank (Fed), since the era of its former president, Paul Volcker.
The most anticipated moment of this “symposium” will be the speech of the President of the American Central Bank (Fed), Jerome Powell, on Friday at 2:00 p.m. GMT. The President of the European Central Bank (ECB), Christine Lagarde, however, will not make the trip to the United States. But Isabel Schnabel, German member of the executive board of the ECB, will go there, and will participate in a panel on Saturday.
Andrew Bailey, the governor of the Bank of England (BoE), confirmed to him that he would be present in Jackson Hole, but only to observe the discussions, without participating in them. “Just a year ago, at the previous Jackson Hole symposium, Jerome Powell had been too complacent regarding the seriousness of the inflationary risk. In hindsight, that was a mistake. In an attempt to limit the damage to his anti-inflationary credibility, the Fed has since made a sharp turn in its monetary policy but the error will not be fully erased until inflation returns to near 2%”, estimated the chief economist of Oddo, Bruno Cavalier in a recent note. The prospect of tighter policy from the U.S. central bank drove rates up, the dollar and lower stocks late last week, with Western stock markets snapping a string of weekly gains.
“Transition”
This meeting is taking place at a time when central banks around the world are tightening their monetary policies to fight inflation. At the risk, however, of hampering the recovery. The mighty US Federal Reserve has already hiked rates four times since March. First of the usual quarter of a percentage point, before accelerating the pace.
And inflation began a welcome slowdown in July, to 8.5% over one year, following beating in June a price increase record for more than 40 years, to +9.1%.
All eyes are now on the next monetary meeting, September 20-21, for which another sharp rise is on the table, half or even three-quarters of a percentage point.
“It is unlikely that the Jackson Hole conference (…) will bring real news on the Fed’s plans for future rate hikes”, according to Carola Binder. Rates are between 2.25 and 2.50%, bordering on the so-called “neutral” level, which neither stimulates nor slows down the economy, evaluated between 2.00% and 3.00%.
Jerome Powell, during his speech, “will want to emphasize the likely transition that is going to occur with monetary policy in the future. One thing they definitely want to communicate is that they remain very focused on price stability issues,” said Jonathan Millar, economist for Barclays.
Credibility
“Jackson Hole might be very important to enlighten us” on the assumption of maintaining high rates, despite an economic slowdown, also anticipates Mazen Issa, specialist in the foreign exchange market for TD Securities.
US GDP has already contracted in the first two quarters, which corresponds to the classic definition of a recession. But according to economists, this is not the case today in the United States, due in particular to the solidity of the job market, which in July returned to its pre-pandemic level, with a rate unemployment at 3.5% and all the jobs destroyed now recreated.
A year ago, during this “symposium”, Jerome Powell mentioned “transitory factors” and warned once morest the risks of a premature tightening. But inflation has since turned out to be tougher than expected, beating central bankers’ forecasts. In the euro zone, the rise in prices has broken a new record, at 8.9%, and England is even experiencing double-digit inflation (10.1%).