Watch out for the central bankers at Jackson Hole
Abraham George Macro Musings
One thing that is very clear from all major central banks as per their last communique is that they are not going to provide any forward guidance. When the ECB raised rates by 50 basis points last month the market expectations were only for 25 basis points.
The ECB President Christine Lagarde stated through a press conference “we are much more flexible, in that we are not offering forward guidance of any kind”. The same lines were echoed by other central banks such as the Fed, Bank of Canada, and Bank of England. What it implies is that they haven’t got a clue of what they will do but will act according to the incoming data. They don’t want to be tough on inflation but leave enough room to not raise rates if inflation data are coming in soft.
The dollar index started rising sharply the moment Fed showed its inclination to raise rates. This has put the Fed and other countries in a very difficult situation. With most of the world debt denominated in US dollars, the rise in dollar puts tremendous pressure on the emerging market countries and a further rise in debt deflation. This is the main reason why an appreciating dollar is not good for emerging markets. At the same time if the US wants to inflate its debt away they need a weaker dollar. We are at a pivotal point and how this will play out is the 64 million dollar question.
The markets are under siege from various Fed officials especially Neel Kashkari who has been a monetary dove all along. He has been talking very tough on inflation and why the US may have to risk a recession but have to take the high road in fighting inflation.
Is this all talk and no substance? I believe it is. We should know soon. The Fed so far has not raised rates aggressively nor have they followed up on QT. If the Fed and other central banks have had any success in the last 14 years it is only because of the excessively loose monetary policy and the unlimited QE that they have injected into the economy. This cannot continue indefinitely.
The yearly Jackson Hole meeting that will be held under the auspices of the Federal reserve bank of Kansas City is starting tomorrow and will conclude on Friday. All the major central banks will be attending the symposium. It could spring up some surprises in the future plans of the central banks.
Some central bank watchers are expecting a coordinated move by central bank-backed digital currencies and some ways to restructure the global debt. We are at the cusp of something big and very different from what we have seen so far.
At the next FOMC meeting, if the Fed hikes only 50 basis points, the equity markets should continue to rise.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.