The Breakdown - Jackson Hole Closes the Door on the Fed’s Dovish Pivot

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, and FTCS, and produced and distributed by CoinDesk. What's going on, guys? It is Friday, August 26th, and today we are talking Jackson Hole. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or If you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX.

Starting point is 00:00:49 All right, team, so it was Jackson Hole Week. What does that mean? Well, Jackson Hole is kind of like TED or something for central bankers. It's an annual conference where they share big ideas, right? it's the place where they talk about not just the immediate upcoming next policy, at least not usually, but they zoom out and signal new or different directions. It's technically held each year by the Kansas City Fed. And while it focuses more on the United States than other parts of the world,

Starting point is 00:01:19 central bankers from all over the world come and participate. It has been the scene for major central bank decision-making in the past, such as crisis talks during the deterioration of the global financial system in 2008, just one month prior to the collapse of Lehman Brothers, as well as the design of the European Union's bond buying program in 2014, as the Eurozone continued to struggle to recover from multiple monetary crises. Jackson Hole is often much more about the big picture of central banking policy and laying out the groundwork for changes in thinking in regime shifts, as opposed to our normal FOMC meetings, which are about what's going on right then. There's no decision-making that happens at Jackson-Hole,

Starting point is 00:01:57 such as a rate decision, and it really is a chance to step back and think about this. the bigger picture. This is the first time the event has been held in person since 2019. In addition to folks from the Federal Reserve, the event is attended by Andrew Bailey, the Governor of the Bank of England, members of the Executive Board of the ECB, leaders of the Swiss-Korean and French Central Banks, and Augustin Carson's, the general manager of the Bank for International Settlements. Notably, this year's symposium marks two years since the Federal Reserve unveiled its new framework, which was intended to overhaul the way that central banks thought about monetary policy. The announcement in August 2020 marked the end of an 18-month review

Starting point is 00:02:35 by the Fed, which included the Fed Lissons program, which saw Federal Reserve figures toward the country seeking feedback and input from citizens. This review sought to solve the problem that had been doggedly confounding central bankers since 2008. How to deal with persistent low inflation, escape the zero lower bound, and return to robust growth. At the time, the U.S. economy was faced with 10% unemployment and less than 1% inflation after the Fed had embarked on the largest quantitative easing or QE policy in history during the pandemic shutdowns. The economic discourse was filled with discussions of equitable recovery, build back better, and MMT economics, which proposed using unconventional monetary policy to finance expanded

Starting point is 00:03:15 fiscal programs such as a job guarantee and a Green New Deal. The Fed's new framework consisted of two main concepts. A, quote, broad and inclusive approach to the central bank's max employment mandate, which proposed taking into account the fact that labor force recovery in the past often excluded minorities in women, and flexible average inflation targeting. This was intended to allow the Fed to target 2% average inflation over a longer time period, in other words, allowing them to run inflation, quote, moderately above 2% for some time to make up for a decade of below target inflation. This new way of conducting monetary policy was demonstrated in late

Starting point is 00:03:51 2021, as the Fed held interest rates down while inflation began to pick up. Their goal was to ensure labor force recovery was as broad as possible, and their approach to keeping rates down was potentially longer than they might have done under a previous monetary policy framework. This new framework has proven to be problematic. Ellen Mead, a professor at Duke University, who worked with former Fed Vice Chair Richard Clarita on the framework review said, quote, the framework itself quickly became irrelevant. In other words, it swiftly became clear that the Fed was not dealing with a situation where inflation would run, quote, moderately above target, but in fact, we were dealing with the beginning of a significant inflationary pulse.

Starting point is 00:04:29 Mead went on, maybe the framework will come back and be relevant again, but maybe it won't. Maybe after the dust settles, it will be what looks to be a world with a somewhat higher neutral rate. Andrew Levin, a former Fed advisor and professor at Dartmouth said, quote, in the long run, economists and others will probably look at the framework they adopted in August 2020 as having some pretty severe shortcomings. Probably the most important one is that they were focused on fighting the last War. Richmond Fed President Thomas Barkin said, I'd have a hard time reassessing the framework right now because I feel like we're right in the middle of the movie, and I don't know whether it's a horror

Starting point is 00:05:00 show or a thriller or a comedy. The thing that stands out to me is that idea that they were fighting the last war. I think in some ways it's understandable. There were severe shortcomings in monetary policy following the global financial crisis and mistakes they didn't want to repeat. The problem clearly with the benefit of hindsight is that the circumstances were just new. A global pandemic shutting down supply chains was not something that we had dealt with before. We didn't know what it was going to take to get supply chains back online. We didn't anticipate that China would deploy a zero COVID policy, which has meant that supply chain shutdowns are now just a part of the landscape that we have to deal with.

Starting point is 00:05:41 To be fair to them, they didn't know that the unwind in globalization, which all of us were seeing already then, would include actual military belligerents from Russia a couple years later, disrupting global food and energy markets. But whatever the set of circumstances, the reality is, the times have changed. And a framework based on lessons learned from the last time just was never going to work. In times like these, security of your assets should be your number one priority. If you want to offset risk as much as possible and still stay in crypto,

Starting point is 00:06:14 you need a trusted partner by your side. Nexo is a security-first company. that manages risk by relying on mechanisms such as over-collateralization, real-time auditing, and insurance on custodial assets. Learn more about Nexo's reliable business model and start your crypto journey at nexo.io. That's nexo.io. Eager to make more informed decisions around crypto, Chainalysis is here to help. Chainalysis demystifies cryptocurrency by providing industry-leading compliance, market-intelligence,

Starting point is 00:06:51 and investigations support for all crypto assets. For organizations like Gemini, Crypto.com, and BlockFi. Gain unparalleled visibility and maximize your potential with the leading blockchain data platform by visiting us now at Chainalysis.com slash CoinDesk. The breakdown is sponsored by FTXUS. FtXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees.

Starting point is 00:07:28 One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCX, you pay no gas fees. Download the FTCX app today and use Referral Code Breakdown to support the show. So what about this year? Well, the theme for this year's event is reassessing constraints on the economy and policy. Speaking at an ECB conference in June, Fed chairman Jerome Powell explained that globalization, aging demographics, technological development, and other factors were no longer having as significant

Starting point is 00:08:03 effects on suppressing inflation. He said, what we don't know is whether we'll be going back to something that looks more like or a little bit like what we had before. We suspect it'll be kind of a blend. We're learning to deal with it. However, more and more, it seems like the economy of the 1990s is not returning, where the Fed was able to maintain strong growth with low inflation and low unemployment using moderate policy settings. This is a situation that economists came to refer to as the divine coincidence. Going forward, it's likely that real decisions with serious tradeoffs will need to be made between inflation and strong labor markets in the pursuit of more modest growth.

Starting point is 00:08:38 This view of the global economy was crystallized by French President Macron this week, who warned that France is, quote, at the end of its age of abundance. So what were people hoping for out of this event? Some were calling for more accountability from central bankers. Marcus Ashworth wrote a scathing article in Bloomberg on Wednesday which opened with the line, there needs to be an honest reflection on the causes of the rampant inflation most of the world finds itself battling. The track record of Central Bank Economic Forecasting is in tatters, as is our confidence that our monetary overlords know what they're doing. Ricardo Rees, an economist at the London School of Economics, pointed out the change of tone from last year's event, noting,

Starting point is 00:09:14 they're saying the right things. Inflation is a problem. Inflation is my problem. This is the opposite of 12 months ago. gain your credibility by convincing workers when they negotiate their wages that they can expect inflation to fall to three or four percent in the next four years. But what about Fed officials themselves? What have they been signaling this week? The tone has been, in a word, hawkish. Minneapolis Fed President Neil Keshkari said on Tuesday, quote, by many, many measures, we are at maximum employment and we are at very high inflation. So this is a completely unbalanced situation, which means to me it's very clear. We need to tighten monetary policy to bring things into balance. When inflation is 8 or 9%, we run the risk of unanchoring inflation expectations.

Starting point is 00:09:56 Kansas City Fed President Esther George said that the Fed hasn't yet raised rates to a level that weigh on the economy. It's very important, she said, that we are clear in our communications about the destination we are headed. We have to get interest rates higher to slow down demand and bring inflation back to our target. Atlanta Fed President Rafael Bostick said that he was of the belief that markets were incorrectly betting on the central bank cutting interest rates in short order. He also went on to forecasts reduced growth next year between 0.5% and 1% compared to his 2% forecast for this year. He also cautioned that it was too early to tell if inflation has peaked. Still, the pattern of late is that markets just kind of aren't paying attention to what the Fed says.

Starting point is 00:10:35 Tom Thornton, the founder of hedge fund telemetry said, I don't think the markets listened to any of the governors. It's going to take Powell to reverse some of the dovish comments he had at the last Fed meeting to have the market take this seriously. Derek Tang, an economist from L.H. Meyer, noted that Fed Chair Powell would be seen as endorsing loose financial conditions if he doesn't comment on them. Quote, The Fed really needs to convince the market you're not taking us seriously enough. We are saying all these things and you are not believing us.

Starting point is 00:11:02 People want to comment from Powell on it and if he doesn't, his silence speaks volumes. Sven Heinrich writes, nothing is more dangerous than a Fed without credibility, as it's lost one of its most powerful policy tools, jaw-boning. Worse, it's their own fault. Under the guise of transparency, the evolution to nonstop speeches has revealed their lack of competence and the market has taken note. Why is it dangerous? Because the market disconnects further from policy reality, easing financial conditions in the process, as opposed to the intended tightening effect prolonging the inflation fight, and deepening the eventual structural consequences. As Mohamed El-Irion said

Starting point is 00:11:35 earlier, this Fed has unfortunately failed at analysis, failed at forecasting, and failed at communication. Indeed, those comments from renowned economist Mohamed El-Eryan came in a bloom TV interview on Thursday. He said that the Fed, quote, should not blink in addressing hot inflation and that the chair faces a huge challenge in finding ways to deal with price increases without damaging the economy. Quote, the Fed is so late that it's looking at two challenges, putting the inflation genie back into the bottle and not creating too much damage to economic growth and inequality. It's going to take some time because the Fed has been asleep at the wheel. Alessio Urban said, wages keep rising, labor market is still tight and inflation too high. The

Starting point is 00:12:14 market is still hoping for a dovish stance. Traders will be disappointed once again, in my opinion. So what did we actually get? What we got was an extremely short-to-the-point speech. Bloomberg writes, Powell talks tough, warning rates are going to stay high for some time. Powell said, quote, restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautioned strongly against prematurely loosening policy. He reiterated that restoring inflation to the 2% target is the bank's, quote, overarching focus right now, despite the fact that consumers and businesses will feel economic pain. He reiterated that another, quote, unusually large increase in the federal funds rate could be

Starting point is 00:12:54 appropriate next month. And he said he was not taking July's inflation numbers as gospel that inflation has peaked. A single month's improvement, he said, falls far short of what the committee will need to see before we are confident that inflation is moving down. In short, we could have probably crowdsource written this speech before it was given based on the things that Powell has been. been saying for the last couple months. All of the markets hanging on the idea, the wish of a doveish pivot, was based entirely on their own optimistic and frankly twisted interpretation of Powell's words. In fact, it was almost entirely driven by two things. The first was Powell saying at the last FOMC meeting that they perceived the rate to be neutral now, in other words that Fed policy was no longer

Starting point is 00:13:36 actively contributing to the overheating, and second, the one month of inflation surprising to the downside. It's clear that that's not really evidence of a pivot. That's just raw hopium. This is something, by the way, that Dmitri Kofenis from Hidden Forces has been screaming about. The Fed has way, way more room to be hawkish than people are giving it credit for. The market seems to think that Powell is going to randomly back off even though he keeps saying the same things over and over. He invokes Volker and makes clear that they are terrified of letting inflation expectations become entrenched. He says they're going to keep watching the data, and data keeps suggesting that inflation remains really high.

Starting point is 00:14:11 And market things aren't breaking. He also keeps saying that they are willing to let there be pain to solve this problem. Quote, pain for households and businesses are a price to pay for bringing down inflation. So the question is, will the narrative finally catch up? Macro Alf wrote today, Powell's Jackson Hole speech was unambiguous, short, direct, crystal clear. The Fed won't make the mistake of stopping too early or allowing financial conditions to unnecessarily ease before the job is done.

Starting point is 00:14:38 In other words, Fed pivot my end. ass. And there you have it. I want to say thanks again to my sponsors, nexo.io, chain aliasis and FtX, and thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. I want to tell you about CoinDesk's new event, the investing in digital enterprises and asset summit or ideas. The event facilitates capital flow and market growth by connecting the digital economy with traditional finance. Join CoinDesk October 18th and 19th in New York City for a 360-degree investment experience, where you can source, invest, and secure the next big deal in digital assets.

Starting point is 00:15:18 Use code Breakdown 20 for 20% off a general pass. You can register today at coindesk.com slash ideas.

The Breakdown - Jackson Hole Closes the Door on the Fed’s Dovish Pivot

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.