What will Jay Powell say at Jackson Hole?

0:06Pushkin. It's that time of year again when if you're into markets like at all, all you hear is Jackson Hole, Jackson Hole, all eyes on Jackson Hole, big week for markets. Well, Jackson, what? Holy who? What's going on? Don't worry, we've got your back. We're here to answer the questions that you're afraid to ask. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT here in London, and I'm joined in real life in the studio by Chris Giles, central banking nerd supremo. Chris, thanks so much for coming along. It's a pleasure, Katie.

0:47So, Chris Jackson Hole, it's one of these kind of big set piece central banker shindigs. It's right up there with Sintra and Humphrey Hawkins and all these kind of old school phrases that get like kicked around. What actually is it? Let's talk about being in or outside the club. People talk about it because they want a lingo. And if you don't know what it is, you feel excluded. So this is our opportunity to get everyone inside the club because it's all rather silly. what it is is essentially a conference yeah it just happens to be in the middle of nowhere so a little bit like davos so people have to go there what is it with that why do we send important people into the wilderness to talk about important things they like it because they're away from their normal work environment when these things started they would have been away fully away communications and everything so they can also go and have informal chats yeah learn stuff it's not open invite conference it's very much an invited audience a bunch of central bankers bunch of academics almost no market economists there and so they keep it away from that so they can have a rarefied discussion and they go hiking so they have the so they have the meeting in the morning and every afternoon they go hiking and chatting.

2:06Because it's in the mountains of Wyoming, right? Yeah, mountains, the Teton Mountains. It's in the Jackson Lake Lodge in Wyoming. And it is two hours time difference from New York, seven hours from London, eight hours from Frankfurt. And so when Jay Powell speaks on Friday morning at 8am in mountain time, that is 11pm in Tokyo and in the afternoon in Europe. Yeah, and it looks really pretty on the telly. It's lovely. I've never been invited. So I feel out of the club. NFI'd completely. Yeah, so it's a very kind of exclusive invite list. It's Fed rate setters, right? It's US monetary policy setters.

2:49But are there other kind of central bankers there? Yeah, so there's normally other central bankers. So this year, Andrew Bailey, the governor of the Bank of England, is going to be there. Last year, Christine Lagarde and Ueda from the Bank of Japan were there. So it is bigger than just the Fed, but the Fed is the centerpiece. And everyone pays attention because quite often it is a set piece speech from the Federal Reserve chair. And these things can change policies. So it's where Jay Powell announced flexible average inflation targeting just before it became a bad idea. It seemed a good idea at the time, but then inflation took off and he didn't really want to wait until the average inflation moved up a lot.

3:35And so one of the things this year is, is he going to kill it? I doubt he is going to kill it. And last year, just a few words from the Fed chair, because it's seen as one of the set piece events of the year, even if it's not very different from his six weekly press conferences, it can be more important for markets. And it's also August. And so it's the only thing that's happening. Yeah, we need something interesting to happen in August. But yeah, last year, Jay Powell, chairman of the Fed, was saying inflation is too high. And that proved to be kind of a big moment for markets because suddenly everyone flipped into this view that, you know, crikey, they're really serious about this higher for longer thing because they'd refused to listen for months and months and months.

4:15They were like, nah, they're bluffing. They're going to cut rates again as soon as they can. Little comments like that from the Fed check can make you really rethink things. And also the timing is interesting, right? Because unless we're all completely wrong, then the Fed is going to start cutting interest rates within weeks. Within weeks, September. The minutes that we had from the last meeting very heavily indicated that they are ready to... Yeah, the vast majority of the committee think they can start cutting interest rates. So they are going to cut interest rates. That's Fed speak for, we are going to cut interest rates.

4:47They are, unless something remarkable happens and nothing's remarkable has happened so far at all. So they're on it. So what is on the agenda? How much do we know about what's on the agenda this year? What are they going to be talking about? It's not going to be the weather, right? No. So the first and most important thing will be the Powell speech. And that's on whatever he likes. So the key question everyone's looking for there is not so much will they cut in September because they're going to cut in September, but it's how fast are they going to start cutting? That's what people are wanting to know.

5:22Markets are really hopeful now of really rapid interest rate cuts. And Fed officials aren't quite there yet, certainly not in public pronouncements. So that's what people will be looking for. And that's the most likely market moving thing. The conference is every year it has a title. And this year it is reassessing the effectiveness of the transmission of monetary policy. They know how to put out the clickbait, don't they? So, you know, do interest rates work? I mean, I could edit that, you know, quite effectively. And that means there will be academic papers on things like the effect on debt and whether interest rates work when debt is high and what governments are doing.

6:04There'll be papers on the mortgage market. There'll be papers on unemployment and whether it's high or low. These sorts of papers will exist. And the backdrop to that is that pretty much everyone thought that with such an aggressive run up in interest rates in the US and elsewhere, stuff would break really quickly. First of all, there could be some sort of financial stability shock. You can't predict these things, but touch wood. Yeah, and we thought in March 2023, we were getting that, didn't we? When SVB went down and we absolutely thought this is the effect of interest rates. And everyone was pretty cataclysmic at the time.

6:41And then actually it was a one-off. It's been okay. But we were expecting loads of like debt defaults, you know, particularly by shaky companies. Actually, it's been pretty well contained. So yeah, the discussion is, okay, how do interest rates work in slowing down inflation? That's the kind of perennial question. And is it working this time? But I want to go back to something that you mentioned, which was around market expectations, because I was writing about this the other day. market interest rate expectations have gone a little bit bonkers recently. People have got really quite overexcited about stuff that they should know better than to get overexcited about.

7:19And suddenly you start to see markets pricing in like massive interest rate cuts from the Fed purely because we had one crappy payrolls release, which looked like an overreaction at the time and has proven to be an overreaction since. but how do we even then there is still a bit of a kind of residual bet out there that what at one of the meetings remaining over the course of this year the Fed will cut by half a percentage point rather than by a quarter percentage point which is the usual increment now how do we know what markets think about the Fed is going to do next and how do we also know that they've gone a bit bonkers well it's quite a complicated market so there are markets in fixed interest rates so you can have on a risk-free basis so you can say because the fed is is risk-free so you can and it's sort of like the treasuries the u.s government bond market but it's it's actually on a sort of on a notional bond where you can say i will pay you katie martin an interest rate of five and a quarter percent over the next four months and someone else might give you a contract of over the next five months.

8:30And therefore, you can work out the difference in price between four and five to see what the implied interest rate in the fifth month is. And of course, very easy to do on a computer. So then you get a curve of where people expect interest rates to be in the future. And that's what we call either the future interest rate or the forward interest rate market. It's an implicit market. So you know what people are expecting over different periods and at different times. And just looking at what the expectation for the end of 2024, so December 2024, the start of this year, the forward US interest rate market suggested there would be six or seven interest rate cuts.

9:11Madness. Went down to one or two by June and it's now at four-ish. This is all over the shop, isn't it? all over the shop. So it's very difficult to say that when you're looking at market interest rate expectations and you sort of think, oh, this must be millions of people, efficient markets, blah, blah, blah. They're all very clever. 7, 1, 4. Within a year. No, within eight months. This is unusual, right? I mean, you've been in this game a long time and it is odd to have this much uncertainty around something so fundamental to how markets behave. Exactly. So it is odd, but it is not odd that the markets get it wrong.

9:51No. Fair. So, you know, for the whole period of very low interest rates, they always expected that period to end at some point in the next two years. And it didn't. And now then they didn't see how quickly interest rates would rise, although they were faster than the central banks when it started happening. And now they've been all over the place about cuts. And the trouble is it also moves across the Atlantic. So the UK and the ECB forward interest rate curves have moved because the US one has moved. And that is just pretty crackers, to be honest. It is crackers, but it's the way it is, isn't it?

10:26It's just like the US government bond market is so enormous that it just exerts this kind of gravitational pull on everything else. And you've also got to remember that, I mean, there's a really good Bank of England paper out last year sometime, which said that in many markets, probably not the US, these are quite thin markets. So three organisations, three hedge funds controlled 80 % of the UK forward interest rates markets. Bonkers, yeah. So they're all betting against each other. It's win-lose and they're betting quite a lot of money. but don't think it's one of these really clever efficient markets where there's millions and millions of people so it's the effective wisdom of crowds it's three people so um to the extent that shifts in interest rate expectations are like they're really meaningful for markets you know as soon as the market gets a sniff that interest rates are going to to fall in the u.s if they think that's because the u.s is heading for a recession that's really bad for stocks so So it matters whichever asset class you're in, whether it is in bonds or in stocks or commodities or anything else for that matter.

11:33So you can't expect surprises. So I know this is a stupid question. But are we expecting anything that really could shake up these expectations from Jackson Hole? I think there's two possibilities that could be quite market moving and they go in sort of slightly different directions. So if Jay Powell is sort of happy Jay and says, look, actually, we think we've got inflation licked. We don't think there's going to be a recession. Everything that points to us is going to be, you know, really, really lovely slowdown and things look set for 2025. We will be cutting interest rates, by the way. Then that is the sort of Goldilocks scenario of November and December last year.

12:15lower interest rates higher stock prices and no recession if you start saying oh now we're really concerned that the u.s economy might be slowing faster than we think could we have maybe made a little bit of an error maybe we might go quite quickly and it sounds a bit panicky yeah then you could even though you've got a very similar interest rate movement he's signaling it could have a very different effect on uh on stock market so i think it really depends not just on what indications he might give, but the sort of tenor of his conversation and his mood. And it is silly that markets should be so sensitive to tiny little signals like that from policymakers, but I'm afraid that's what it is.

12:58I mean, the temptation for Jay Powell must be to, you know, stand there with that beautiful backdrop of the mountains in Wyoming and unfurl a mission accomplished banner and say, all you people who doubted that we could raise interest rates and squash inflation without killing the economy, I've proven you wrong. Is he likely to do that, do you think? No, because central bankers never do that. Well, they do, but they do it after the fact. So he's not 100 % certain he could get away with it. And they're pretty cautious. So they'll say how they're checking out and being very, very mindful of the two-sided risks and all of this sort of language.

13:37They're humble, thoughtful people as a rule. And they'll try and sound sort of thoughtful, intellectual. And frankly, everyone there will. It's a sort of conference where someone gives a paper and then everyone feels they need to make a clever comment about it to show. It's a little bit like leader conference at the FT, you know, which you have, of course, been to, where everyone feels they sort of need to say something, even if they've got nothing to add. You're just bitter because you've never been invited. I've never been invited, so I'm terribly bitter. And it's coming across, isn't it? So your prediction is they don't set fire to the markets?

14:12I think that's most likely. I think he will say that they don't see recessionary signals, but I don't think he'll do the victory lap. If you are wrong, and he does in fact unfurl a mission accomplished banner, I will get you on next week to explain yourself. I can short myself. And you can short yourself. In the meantime, we're going to be back in a sec with Long Short. Alrighty, now it's time for Long Short, that part of the show where we go long, a thing we love, short, a thing we hate. Chris, what you got? I'm going to go long, exclusive conferences like Jackson Hole, because even though both of us have been to Davos many times and it's pretty excruciating, people who don't go are not invited desperate to go so long Bilderberg Davos Jackson Hole Cintra the Munich Security Conference and FT Business of Luxury Conference I think just to add that in at the end we have had some amusing times in Davos to be fair when because it's just so utterly exhausting that I seem to remember we got the giggles quite badly in a pizza restaurant with Gideon Ruckman at the end of one year.

15:24Quite a lot of alcohol, I think. You'd be drunk as well. It's not as glamorous as people think, I can assure you. I am limit short exams. They are finally over. Praise be. All the exams for 16-year-olds and 18-year-olds in the UK are over. The results are in. I am never doing this nonsense again. I mean the real heroes in all this Chris I'm sure you will agree are the parents oh god yes we're the ones we can't do the exams but we sit in there cold sweat fretting and you know we don't even get the results you've got to go to your child and say what did you get what what did you get well done for all that effort you made yourself with no support from me you've got another set in two years time haven't you i'm not thinking about that so that's it for today listeners we're going to be back in your feed on tuesday so listen up then before we go we have a new feature you can now listen to the ft's latest stories and podcasts in your car with apple carplay if you've already downloaded the ft app simply connect your ios device to your car and you'll see the ft app logo on your Apple CarPlay screen.

16:44The FT app is available to download in the App Store if you don't already have it. Listen to the latest episodes of any podcast, including Unhedged, and top news stories updated throughout the day. More information is available on our help page at help.ft.com. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhez. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free.

17:22A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

17:38the FT weekend festival in London is back join us September 7th at Kenwood house for a day of talks tastings and interviews sit in on conversations with your favorite FT writers and guests like actor John Lithgow broadcaster Michelle Hussain and columnist Tim Harford you can find out more about the festival in our show notes, including a discount on a ticket. See you there.