What Can We Expect From Jackson Hole?

The valley of Jackson Hole in Wyoming, and the nearby town of the same name, have become synonymous with economic decision-making. Every year, the Federal Reserve Bank of Kansas City organizes the Jackson Hole Economic Symposium: A get-together of central bankers, economists, and policymakers, who take a long weekend to discuss the key challenges facing the US and the world.

The market tends to listen to what's said at these events, because they're a chance for the Fed to deliver important messages about the state of the economy and how they might seek to manage it in the months ahead. So, what can we expect from this year's meeting, which will start in a few hours' time?

Mission (Almost) Accomplished

Last year, Fed Chair Jay Powell made it abundantly clear to the world that inflation was too high, and it was the Fed's job to bring it back under control by whatever means it could. (Incidentally, there aren't too many levers they can pull, and the biggest one is interest rates.)

A year later, that job is almost done. Inflation appears to have peaked in the US, and is heading back towards its 2% target. Mindful of the mistakes of decades past, when the Fed took its foot off the brake too fast and let inflation spike again, Powell will be keen to communicate that they will stay the course this time. However, rates are now surely close to their peak, with perhaps one more increase of 25 bps to come. If there was a Jackson Hole bingo card, though, the words "Higher For Longer" would definitely appear on it.

Higher For Much, Much Longer?

That would not be too controversial, since Powell has said something similar at every available opportunity over the last year. Markets are now pricing in months of rates in the 550 bps region, before beginning a series of rate cuts sometime in 2024.

But there's another message he might hint at, which is that rates are going to stay high indefinitely. Maybe not at their current levels, but the era of easy money and near-zero rates is definitely over.

In the post-pandemic world, certain inflationary pressures appear to have become embedded, or "sticky". Wage-price spirals, expectations of continuing inflation, uncertainty about the future, and other factors can mean inflation becomes endemic—requiring a robust response. Core inflation in the US is coming down, but proving somewhat stickier than the Fed would like.

That question—how long interest rates will remain high—will feed into the markets' general risk appetite. Remember, the higher rates are, the higher the "risk-free" return investors can get on their money, and the less likely they are to seek returns from riskier assets. That includes stocks and, of course, crypto.

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