The Jackson Hole symposium: indications regarding new rate hikes

The Jackson Hole Symposium has been taking place since 1978, as a key event for determining the future course of monetary policy. These meetings are held in northwestern Wyoming near the town of Moran, at the Jackson Lake Lodge in Grand Teton National Park, and although decisions are not made there by the participating central bankers, the event does serve as a venue for establishing forward guidance, a concept that has taken on special relevance for financial institutions since the 2008 economic crisis. On this occasion, the symposium took on additional importance in view of the historically unprecedented series of interest rate hikes announced in recent months, which could be coming to an end on both sides of the Atlantic.

Specifically, tomorrow (during the afternoon hours in Spain) is the day when Jerome Powell, chair of the Federal Reserve, and Christine Lagarde, president of the European Central Bank (ECB), will be taking part in some of the workshops being presented this year under the theme “Structural Shifts in the Global Economy”. The event has been organized by the Kansas City Fed, which has stated that “while the immediate disruption of the pandemic is fading, there likely will be long-lasting aftereffects for how economies are structured, both domestically and globally, as trade networks shift, and global financial flows react. Similarly, the policy response to the pandemic and its aftermath could have persistent effects as economies adjust to rapid shifts in the stance of monetary policy and a substantial increase in sovereign debt.”

Based on the previous meeting held in July, both the Fed and the ECB implemented rate hikes, bringing their key lending rates to 5.25% and 4.25%, respectively. As explained by the experts from MAPFRE Economic Research, “it is looking like the second half of the year will represent an extension of the expansionary cycle, leading to a terminal rate higher than expected, with an additional 25 basis points (bps) that could be indicated for August-September at the next Jackson Hole Symposium (implicit rates, with more volatile probabilities)”. After that, it would be plausible to establish a new pause (a unanimous decision in June), which would allow further assessment of the cumulative effects of monetary tightening, with the conditionality maintained for a longer period of time. The experts from MAPFRE Economics go on to state that “in light of the most recent meeting, the mixed signals that supported the previous pause are continuing, without any clear indication of the terminal rate that the Federal Reserve intends to reach. Although the latest changes to key indicators are offering a slightly more positive reading, they are not yet shedding enough light to allow the direction of the next moves to be determined. This is reflected in the futures markets, where the most recent developments have been keeping the existing ambiguity intact.”

Although a more balanced outlook is being seen in terms of employment, the effects are still superficial. Job creation remains solid, with the job vacancy rate prevailing in terms of the existing imbalance, while the unemployment rate remains unchanged since the beginning of the monetary tightening phase. Based on the latest inflation data, June was the 12th consecutive month with year-on-year (YoY) decreases in headline (3.0%) and core (4.8%) inflation, with energy dropping by 17% YoY, food decreasing to 5.7% YoY, and goods recovering their trends seen prior to the pandemic. Services (excluding housing) are also moving in the right direction, with leasing components representing more than one‑third of this index. However, this metric is also reflecting a time lag, because it does not yet capture the declines in new leasing and renovations indicated by other high-frequency sources (see Chart 4). As explained by MAPFRE Economic Research, “in short, a series of positive data points are suggesting that the need for additional rate hikes has become less urgent. “Although the Federal Reserve remains cautious about revealing its next moves, progress in the right direction continues to tip the scales in favor of a scenario where interest rates will remain at their current levels, prioritizing concerns about demand over those regarding inflation in the coming months. However, there is still a possibility that a materialization of risks on the inflation side will be addressed with an additional rate hike after summer has ended,” they conclude.

The ECB, for its part, raised its interest rates by 25 bps on July 27th (to a range of 4.50% for the marginal lending facility, 4.25% for main refinancing operations, and 3.75% for the deposit facility), in a widely telegraphed move carried out in tandem with the Federal Reserve’s decision. The aim has been to ensure sufficiently restrictive levels to push inflation back to its 2% target, but along with a message of worsening outlooks that would suggest a shift towards a more data-driven approach to future decisions. In terms of its balance sheet, the ECB continues to offer no significant changes, maintaining its steady course that consists of selling securities acquired under the Asset Purchase Programme (APP) at an average pace of €15 billion per month, reinvestment under the Pandemic Emergency Purchase Programme (PEPP) at least until the end of 2024, and gradual phasing out of its targeted longer-term refinancing operations (TLTRO). The only real novelty is seen in adjustment of the minimum reserve levels for banks, which will be reduced from the previous rate of 3.25% (deposit facility interest rate) to a new 0% rate. This decision is expected to have a positive influence of proper transmission of the existing monetary policy.

In this context, MAPFRE Economics believes that despite this change in focus, the same variables (inflation, economic activity, and financial stability) will continue to influence future decisions regarding interest rates. “However, the need for reaction must now take into account a series of developments that present an outlook where concerns about doing too little to rein in rising prices is, to some extent, giving way to discussion of concerns about doing too much in a situation where the best-case scenario may come to exist. In summary, the appetite for further interest rate hikes seems to have diminished after this most recent meeting, but not enough to clearly establish a pause scenario. Inflation remains relatively uncontrolled and subject to both internal factors (salary negotiations) and external factors (new rounds of imported inflation), and monetary tightening is already having a negative impact on demand for borrowing. However, the delay in initiating monetary normalization, and the existing rate differences with the Federal Reserve, should be maintained. This will provide additional support for the currency in the face of persisting global challenges, a fragile balance of trade, and a highly expansionary approach to determining fiscal policy.