Jackson Hole – What must be the agenda for global central banks?

As some of the most influential central bankers in the world meet at Jackson Hole in Wyoming, the markets are awaiting the outcome with bated breath. We have some early indications from Janet Yellen while Mario Draghi is yet to outline his views at the meet. While Yellen, Draghi and Kuroda will be closely watched, the markets will also be looking at other views from Asia and Latin America. There will be basically 3 key agenda items at Jackson Hole for global markets to watch out for.…

Rates trajectory from here… 

That remains the big question. The Fed had promised 3 rate hikes in 2017 and has already delivered 2. It looks set to delivery 1 more this year and 3 more in the next year. While the equilibrium rate will still be lower than the pre-crisis rate, the question is whether the current US growth justifies such aggressive rate hikes. The IMF has already indicated that the US economy is likely to grow at just about 1.7% against a global average of 2.8%. Ironically, the Fed has been the most hawkish of the lot. That sounds fairly incongruous as Europe is actually showing green shoots of an economic recovery but has stuck to its dovish monetary stance. In the case of US, both GDP growth and inflation have lagged behind and only the jobs data has been supportive of rate hikes. Jackson Hole will be the key in gauging how the Fed will calibrate its rate trajectory in the months to come.

What about monetary divergence? 

This is the million dollar question. If the US sticks to its hawkish monetary policy and the ECB and Japan stick to their dovish stance, then the result could be a huge monetary divergence. This just gets starker because it is Europe that is showing signs of a recovery in growth and not the US. Recent actions by Donald Trump and the loss of market confidence only highlight the risks of monetary divergence. This kind of policy divergence is dangerous as it can create tremendous volatility in global financial markets. We saw that trend in early 2016 and that could very well repeat itself this time around.

But, what about tapering…

Probably, what the markets are really worried about is the pace of the tapering of the bond portfolio. But the US is not alone. If the US has a bond portfolio of $4.5 trillion then the ECB, BOJ and Bank of England also have a combined bond portfolio of close to $8 trillion. Here tapering cannot be synchronized as it will create a huge liquidity crunch in the global financial markets resulting in bond yields shooting through the roof and bond prices crashing. That is why; the taper trajectory could be the most important cue coming out of Jackson Hole. For the sake of global markets one hopes that it is not pushed through. Above all, taper must not be synchronized! ©

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