The two day Economic Policy Symposium in Jackson Hole, Wyoming was first organized by the Federal Reserve Bank of Kansas City 35 years ago in 1982. Since then it has been one of the most anticipated events of the year as it gives a hint on what future monetary policies will look like. Attendees include heads of central banks, economists, and academicians from all over the world.
Each year a specific topic is chosen to be discussed in this two day event. This year, the discussion will center on “Fostering a Dynamic Global Economy”. While the content of the discussions are kept tightly under wraps, speculation is rife about what should be discussed at Jackson Hole. The two main speakers will be US Federal Chairman Janet Yellen and European Central Bank President Mario Draghi. Their speeches are going to be the clues to the direction monetary policy is going to take going forward.
So, the question to ask is, how will monetary policy affect the current economic situation? Firstly, Congress has mandated that employment has to be maximized, prices stabilized, and long-term interest rates in the US economy need to be moderated. Now, the US has had a cautious but steady expansion for the last 8 years, and this is the time that inflationary pressures are expected to start building up. Therefore, Yellen has raised short-term interest rates, but gently. The last raise took place in June of this year, by 0.25%, thereby increasing the target rate from 1% to 1.25%. This is based on another expectation that as economic activity expands moderately, the labor market will correspondingly also strengthen. Basically, as labor becomes more expensive, prices will rise. Therefore, caution is the key word to ensure that the markets don’t turn down into another recession.
In her speech at the symposium, Yellen defended the financial regulations that were imposed after the 2008 market crash, stating that these reforms have made the market safer and the economy more stable, and that any changes to those regulations should be “modest”. Regulations in relation to small to medium-sized banks could be changed to make credit easier, and that there could be some changes made to the Volcker rule, however, what those changes were to be were not specified. American Bankers Association President, Robert Nichols, tweeted that he agreed with Yellen’s strategy. That gains made should not be compromised, but regulations that are not worked need to be fixed. Unfortunately, her speech was in direct opposition to President Donald Trump’s campaign speech of pushing for complete deregulation.
Markets have been see-sawing in the last week, based on the speculation of what would be discussed during the symposium. Wednesday saw the lightest trading volume of the year, with only 5 billion shares being traded, vis-à-vis the YTD average of 6.4 billion. Thursday saw stocks closing slight lower. Then, after House Speaker, Paul Ryan, spoke about the possibility of a tax-reform package being passed and the tax ceiling being raised, prices rallied.
While the stock futures opened on a high on Friday in anticipation of Yellen’s speech, the dollar weakened after Yellen’s speech, and pulled down equity markets across Europe. The FTSE 100 closed lower at the end of trading, going down 5.6 point to end the day at 7,401.46, as the pound rose in value against the dollar due to Yellen’s speech.
Draghi speech further weakened the dollar with the Euro gaining at $1.1925, versus Thursday’s $1.18. While Droghi also did not talk about monetary policy, however, he mentioned that economic recoveries in the global markets were firming.