US Federal Reserve chairman Jerome Powell. Picture: REUTERS
US Federal Reserve chairman Jerome Powell. Picture: REUTERS

Washington/Frankfurt — Summer break for central bankers ends this week when their leaders gather on Friday and Saturday for the Federal Reserve’s annual policy symposium in Jackson Hole, Wyoming.

With Fed chair Jerome Powell set to deliver a Friday morning speech, investors will be looking for clarity on several issues, from the likely path of interest rates and balance sheet policy to Powell’s take on emerging-market turmoil.

The Kansas City Fed, which hosts the symposium, will release the schedule of speakers and list of participants on Thursday at 8pm New York time. The conference’s official theme is the economic impact of superstar firms like Amazon.com.

The Fed is widely expected to hike rates for a third time in 2018 in September, but a fourth move in December is less certain. It is also unclear how far officials will go before at least pausing in their gradual upward march. Powell added haze to the picture in July when he told US legislators that gradual rate hikes were appropriate "for now".

"This whole issue of how they’re going to change the language of their guidance" on the path of rates, "and what ‘for now’ means is really what they need to get on to," said Ward McCarthy, chief financial economist at Jefferies in New York.

Barclays chief US economist Michael Gapen in New York said he is keen for an update on where the Fed is headed with its balance-sheet reduction. That runoff is also reducing the level of reserves in the banking system and, by some indications, affecting the Fed’s ability to manage the benchmark federal funds policy rate.

"In that world, they are going to have to assess whether the funds rate is the right tool," Gapen said. "Is there enough life in that instrument, and if not, what should be the policy rate?"

Meanwhile, stress in emerging markets, particularly Turkey, is likely to generate discussion on the sidelines of the gathering. Economists predicted, however, that unless global financial conditions worsened considerably, the Fed would not delay hiking in September.

"Until this represents a proximate threat to the US economic outlook, the Fed will probably not be deterred from doing the appropriate thing on the basis of domestic fundamentals," said Carl Tannenbaum, chief economist at Northern Trust in Chicago.

US economic growth jumped in the second quarter to an annualised 4.1%, and to 2.8% year on year. Inflation remained tame even as unemployment fell to 3.9% in July.

Global risks

The global economic picture is not quite as rosy. In addition to emerging-market worries, widening trade disputes and hints of cooling growth in China pose risks to global expansion.

The European Central Bank (ECB) has laid out a relatively clear policy path over the next year. It plans to halt bond purchases by the end of 2018, and keep interest rates at record lows "at least through the summer of 2019".

But ECB president Mario Draghi has repeatedly warned that "prominent" global uncertainties are the main downside risk to the otherwise robust expansion.

European policy makers have kept quiet through the summer break. They will gather on September 12-13 for a policy meeting and to review the ECB’s latest set of economic forecasts.

The bank’s weekly schedule indicates no executive board members will speak at the Jackson Hole symposium this year, although some officials are likely to attend.

The Bank of Japan (BoJ) has not commented on which of its officials might appear.

After making its most significant adjustments to policy in two years in July, the BoJ is still gauging market reaction. Governor Haruhiko Kuroda has said that the bank will re-calibrate its bond market operations over the coming months to allow for higher 10-year yields. There are expectations that the BoJ will also begin a stealth tapering in its exchange-traded funds (ETFs) purchases after it said the volume of buying would depend on market conditions.

The Bank of England (BoE) — which is wrestling with the implications of the country’s impending departure from the EU — has not announced whether governor Mark Carney will make it to Jackson Hole.

The key question facing the BoE is whether its decision to raise interest rates in August was not too hasty. With little progress achieved in negotiating a post-exit trading relationship with the EU, central bankers in the UK have to plan for the potential of a so-called hard Brexit.

Not to be forgotten is the official theme of the Jackson Hole symposium. Research papers being presented, and most of the formal conference discussions, will focus on increasing market concentration across developed economies. With fewer firms controlling larger market shares in many industries, economists have been studying whether that concentration may reduce competition, with negative consequences for consumers, workers and the economy.

Bloomberg