Like every summer since 1982, central bankers from around the world gathered in Jackson Hole, a prestigious winter sports resort in Wyoming. This year was marked by a determined intervention by the President of the American Federal Reserve, confirming that the central banks would no longer save the stock markets.
In 40 years, the Jackson Hole economic symposium, organized by the regional headquarters of the Federal Reserve (Fed) in Kansas City, has become an unmissable event. This year’s program was once again rich with interventions notably from Gita Gopinath (deputy managing director of the International Monetary Fund) or Agustin Carstens (directing general of the Bank for International Settlements) on the side of the economists. But the people everyone is listening to at the end of August in Wyoming are the central bankers. In 2012, Ben Bernanke, then chairman of the Fed, prefigured the launch of the institution’s third quantitative easing plan (QE3). In 2014, it was Mario Draghi’s turn to announce an upcoming vast securities buyback program by the European Central Bank. Three years later, still president of the ECB, the Italian economist distinguished himself by a resolutely optimistic speech, kicking in touch with the many grievances. And in 2020, Jerome Powell announced by videoconference (pandemic requires) that the Fed would now tolerate more inflation in order to support the job market.
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In 40 years, the Jackson Hole economic symposium, organized by the regional headquarters of the Federal Reserve (Fed) in Kansas City, has become an unmissable event. This year’s program was once again rich with interventions notably from Gita Gopinath (deputy managing director of the International Monetary Fund) or Agustin Carstens (directing general of the Bank for International Settlements) on the side of the economists. But the people everyone is listening to at the end of August in Wyoming are the central bankers. In 2012, Ben Bernanke, then chairman of the Fed, prefigured the launch of the institution’s third quantitative easing plan (QE3). In 2014, it was Mario Draghi’s turn to announce an upcoming vast securities buyback program by the European Central Bank. Three years later, still president of the ECB, the Italian economist distinguished himself by a resolutely optimistic speech, kicking in touch with the many grievances. And in 2020, Jerome Powell announced by videoconference (pandemic requires) that the Fed would now tolerate more inflation in order to support the job market. As we know, this last strategy did not last very long, coming up against the post-pandemic price spike. Reappointed at the beginning of this year for a second term, the president of the Fed was this time expected at the turn. And the least of the things to write is that he struck a decidedly determined tone to fight inflation with a few strong phrases. Jerome Powell thus declared that “to restore price stability, it will probably be necessary to maintain a restrictive policy for a certain time”. Announced a few hours earlier, the inflation figures below expectations therefore did not raise an eyebrow at the President of the Fed, who insisted on the need to break inflation expectations, even if it meant weighing down the economy… “Rising interest rates, slowing growth and easing labor market conditions will bring inflation down but households and businesses will suffer too. These are the unfortunate costs of reducing the inflation.” In the space of eight minutes, Jerome Powell caused Wall Street to plunge by more than 3%, dampening hopes of a soft landing for the American economy. That is to say a slowdown in inflation without recession, implying a delay in the rise in rates. On the contrary, the Fed Chairman’s speech forced investors to revise their rate expectations upwards. For the Fed’s meeting on September 20 and 21, the markets no longer rule out a further increase in its key rate by 75 basis points, to 3%-3.25%. The Fed would then continue to raise its key rate to 4% early next year. Above all, the tone adopted by Jerome Powell has greatly reduced the prospects of a rate cut from next summer or fall, in the wake of the slowing economy. “It is clear that the Fed will continue to raise rates and reduce its balance sheet until it clearly manages to control inflation,” summarizes Bob Michele, head of fixed income, currencies and commodities at JPMorgan. Asset Management. “This fantasy that it will start cutting rates a few months after the last hike is absurd,” he said. Bond markets reacted much less strongly to Jerome Powell’s speech, especially US Treasury yields (US sovereign bonds). The 12-month yield eased slightly last Friday after hitting a 15-year high of 3.41% the previous day. The 10-year yield remained stuck around 3%, still far from the peak of 3.5% reached in mid-June. Different explanations can be put forward, such as the fact that Treasury bonds played the role of safe haven in the midst of the stock market crash. Moreover, not all observers are convinced by Jerome Powell’s determined tone. For Andrew Brenner, head of fixed income securities at National Alliance Securities, the Fed Chairman “has certainly adopted a hawkish tone (supporter of a strict monetary policy to counter inflation, editor’s note) but we believe that he remains a dove (supporter of a more lax monetary policy favoring the economy, editor’s note) in wolf’s clothes”. The American strategist had already estimated last May that inflation had reached a peak in the United States. A prediction that so far seems to be correct if we rely on the personal consumption price index (PCE). Core inflation (excluding volatile elements: energy and unprocessed food), the Fed’s benchmark barometer, reached 5.3% in February and has since slowly fallen to 4.6% in July. US consumer inflation expectations have also moved in the right direction. According to the New York Fed survey, they even fell in August. The median expectation for one-year inflation thus fell from 6.8% to 6.2%. Three-year inflation fell to 3.2% from 3.6% the previous month and more than 4% at the end of last year. Jerome Powell having insisted on the fact that “the inflation expectations of the public can play an important role in the evolution of inflation”, this kind of indicator could take on more importance. Note that the results of the New York Fed’s next survey are expected on September 12. For Neil Irwin, chief economist for the media Axios, the current tone of the President of the Fed must be appreciated in the light of his speech a year ago when he insisted on the character “transitional” and “temporary” of inflation. After this failure, “Jerome Powell and the Fed now want to build their credibility, which means that even if their best estimate is that inflation will fall on its own, they cannot take risks”. We should therefore not count on the Fed to appease the markets in the event of disappointing figures. On the contrary, any data tending to indicate that the peak of inflation has not yet been reached in the United States would encourage American bankers to further harden their stance, raise rates and withdraw liquidity injected over the past 15 years ( via quantitative easing) in the markets. Even if the US economy slips into recession. A panorama all the more gloomy that even in Europe, the European Central Bank (ECB) intends to harden the tone. Francois Villeroy de Galhau, Governor of the Banque de France and member of the ECB, thus declared last weekend in Jackson Hole that a lasting rise in the cost of credit was necessary with “an important stage in September”. The ECB could thus announce an increase in its key rates by up to 75 basis points at the end of the month, which would simply be unprecedented. Although the European economy is already on the precipice due to its gas supply difficulties. On the stock market, such a scenario would affect all market segments. Growth stocks are indeed exposed to interest rates. Schematically, the higher the rates, the more the present value of their future benefits decreases. So-called value stocks are much more cyclical. If the economy falls into recession, sectors such as raw materials, industry or automotive will see their results drop. Even defensive stocks are not immune. Real estate companies are exposed to rising rates, the consumer staples sector (food products, supermarkets) is under pressure when households have to restrict their budgets… But the current uncertain and risky environment could also lead to a much more favorable scenario. The slowdown in inflation is accentuated in the United States, the rise in prices is approaching the Fed’s 2% target and the latter may slowly let go of the reins at the beginning of next year. In Europe, the rise in the euro (in the wake of the fall in euro rates) and the success of the strategy to reduce energy dependence on Russia are also calming prices and allowing the ECB to consider a more limited tightening of its monetary policy. The easing of rates is coupled with sustained growth as the decline in energy prices reduces the pressure on household budgets and the United States makes progress in implementing the 437 billion investment plan dollars voted last month. Extreme scenarios that should result in increased stock market volatility over the next few weeks or even months. And not only for the equity markets, bonds are also affected by the withdrawal of liquidity by central banks and the rise in rates. Each piece of inflation data could thus trigger knee-jerk reactions in the markets. A reliance on macroeconomic indicators that symbolizes the normalization of central bank policy after a long period of unwavering support. The time when bad news is interpreted positively, because it encourages central banks to be more lax, thus seems to be over.
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