Global investors look to Jackson Hole for signs of how QE will end

Janet Yellen

It was at Jackson Hole in 2014 that Mario Draghi prepared the ground for the European Central Bank’s massive bond-buying programme to help rescue the economies of the eurozone, embattled from years of sovereign debt crises.

The annual event, held at the Wyoming fishing retreat by the Federal Reserve Bank of Kansas City since 1978, takes place from 24 to 26 August. And it could provide the backdrop for the ECB president to signal the eventual withdrawal from loose monetary policy by the central bank.

Pressure is mounting on the world’s central bankers to give more clues about how they intend to exit huge stimulus packages unfurled to dig the global economy out of a hole after the financial crisis. After a decade of low-interest rates and bond buying, a process known as quantitative easing, the Jackson Hole summit could be a platform to convince markets they can safely wean the world off cheap money.

“It’s an important event because we’re at a critical crossroads for many central banks, especially, I would say, for the ECB. The global economy, many economies, still need expansionary policy – but I don’t think we need this extreme form of monetary policy,” said Robert Bergqvist, chief economist at Swedish bank SEB.

The ECB is spending €2.3tn (£2.1tn) on its QE policy, while the Bank of England injected £435bn into buying gilts. The Federal Reserve, which is further ahead thanks to a faster recovery in the US, started raising interest rates in December and has bought more than $4.5tn of assets (£3.5tn). Still, normalisation may not be the easiest path for central bankers, with fragile economies, inflation not taking off as expected and the potential for roiling the financial markets with sudden changes.

“The rollback of QE is an experiment that has never been tried before and it is not clear how markets will react,” said economists at fund manager Intermediate Capital Group. “Their ownership of the market is significant. As markets anticipate Fed balance-sheet reduction and reduced ECB buying in 2018, the risk of market disruptions will increase.”

The Fed chair, Janet Yellen, is the first leading figure to speak at the event on Friday, followed by Draghi later that day. The Bank of England’s deputy governor for monetary policy, Ben Broadbent, is expected to attend the symposium but is not scheduled to speak publicly.

The meeting risks being overshadowed by political events, after posturing from Donald Trump and Kim Jong-un rattled markets this month and the US president became embroiled in a bitter row over his failure to denounce far-right extremismafter the death of a counter-demonstrator at a rally attended by neo-Nazis in Charlottesville.

Yellen said in June that the Federal Reserve would begin to reduce the size of its balance sheet “relatively soon”, leading to speculation the central bank could start to reduce reinvestments of maturing securities it holds this year.

“Yellen could say the Fed is going from ‘relatively soon’ to ‘soon’. If she wants to implement this in October, she could announce it in September,” said Kathy Bostjancic, head of US macro investor services at Oxford Economics.

Draghi may not want to use Jackson Hole to signal the end of the ECB’s bond buying, according to David Meier, an economist at Julius Baer. The governor may instead look to “downplay as much as possible the effects of monetary policy normalisation in order to keep financial markets calm”, he said.

Instead, Draghi could repeat a message he gave in June at the ECB forum in Sintra, near Lisbon, when he expressed confidence in the eurozone economic recovery and reminded investors the ECB’s exit from QE would be contingent on calm conditions on the financial markets, according to Mark Wall, chief economist at Deutsche Bank.

While Draghi is not expected to set expectations for the timing of a decision on QE, he could “still make a throwaway comment” on currency exchange rates that would pique the markets’ interest, Wall said.

Although the Jackson Hole is billed as a get-together for central bankers and academics to discuss topics not necessarily of immediate concern, looking instead at emerging issues and trends, the meeting has become a key item watched by global investors and others for signs of their thinking.

The Financial Times last week found six central banks – the Federal Reserve, ECB, Bank of Japan, Bank of England and the Swiss and Swedish central banks – now hold more than $15tn of assets, more than four times the pre-crisis level, following their policy interventions.

Powered by Guardian.co.ukThis article was written by Richard Partington, for theguardian.com on Sunday 20th August 2017 13.03 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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