August 19, 2014 / 12:01 PM / 3 years ago

COLUMN-The problem with Jackson Hole: James Saft

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

Aug 19 (Reuters) - There was a time, and I admit I miss it, when the August Jackson Hole conference of central bankers got about as much mainstream attention as a particularly well-attended chess match.

Those were the good old days, before financialization, economic crisis and political paralysis gave monetary policy an arguably too central role in the economy and the allocation of capital.

This week when central bankers from around the world meet at the Kansas City Federal Reserve’s conclave at Jackson Hole, Wyoming, investors and many other people who ought to have better things to do will pay avid interest to the proceedings.

While the Kansas City Fed's conference has been held every August since 1978 a quick check of Google shows the world only showed small interest in it until 2006. ( That, of course, was the last year before the financial crisis took hold, since when there has been an annual spike in stories detailing what Jackson Hole participants may say, what they actually did say, and how much markets went up after they said it.

This is a trend which exists for good reason, but with malign underpinnings.

The good reason is that, of course, the economy needed rescuing, and of course, central banks had to play a central role in that, something which increased their power and influence within the economy. The less positive side of this is that, at least in the U.S., an active central bank has for several years partly filled a void created by legislative and executive branches unable to agree on a policy.

The irony is that, by many measures, this hasn’t worked very well, with an extended though halting and feeble recovery which has backed central bankers into a corner, leaving no leeway to actually raise interest rates.

In fact the overwhelming consensus, going into the 8th Jackson Hole meeting of the financial crisis era, is that Fed Chair Janet Yellen, faced with some weak economic data at home and what looks like an incipient recession in Europe, will deliver there a dovish message, implying that rate increases are not coming soon.

So solid is the expectation that Yellen will reassure financial markets that Steven Englander, foreign exchange analyst at Citigroup, divides his three scenarios for her speech between “full dovish”, “semi-dovish” and “contingent dovish”.


Each of the past seven Jackson Hole conferences has led to a stock market rally, with often substantial gains after the announcement or flagging of some new twist in the attempts to revive the economy by cutting the price of borrowing and raising the price of assets.

That, in itself, explains the interest. Everyone loves getting richer, if only illusorily, and so they like to listen to what central bankers have to say. While the stock market has had various stories to propel it in recent years, social media stocks a notable one, the real support has come from monetary policy.

This, in fact, goes beyond Jackson Hole. A study by economists at the New York Federal Reserve (here) found that since 1994 a striking 80 percent of excess stock market returns in the U.S. came in just the 24-hour periods before Federal Reserve interest rate announcements. That's because during the Alan Greenspan era the Fed provided succor to the market when the economy was in trouble, while looking the other way when bubbles like the subprime or dotcom were inflating.

Under Ben Bernanke and Yellen there has only been a weak economy to support, but the flow of stimulus has been relentlessly one way. This year will be no different, and unless we get an unexpected pick-up in the economy soon, the next U.S. recession will arrive with no room to cut rates.

The broader issue here is that the use of asset inflation as the go-to tool to fix the economy has conditioned investors to pay inordinate interest to monetary policy, which ideally should be a fine-tuning tool for the economy rather than something like an engine of growth.

And, as some central bankers themselves might agree, there are good reasons to regret the centrality of monetary policy. A generation of investors and business people has learned to allocate capital under these conditions and the results have not been encouraging.

The real question is whether that centrality is situational or something more permanent. Will there ever again come a time when equity markets don’t outperform just before the secular Christmas of Jackson Hole or Federal Open Market Committee meetings?

That is a question that will probably not be discussed and certainly not answered at Jackson Hole. (At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at and find more columns at (Editing by James Dalgleish)

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