Who’d want to be chairman of the Federal Reserve? None of us say exactly what we mean all of the time. But if you are the head of the world’s most important central bank, it really matters.
No-one’s words are more closely scrutinised, every nuance analysed to death, than the Fed chair’s. And his speech tomorrow at the annual Jackson Hole symposium in Wyoming is likely to be more heavily dissected than usual.
That’s because the future direction of the US stock and bond markets - and by extension the rest of the global financial system - is hanging on Jay Powell’s every word.
We know this because most of the big market moves over the past year have had a Fed angle. The dip in markets last autumn reflected investor worries that the Fed was tightening too hard in the face of a global economic slowdown. The rally in the first quarter came after the Fed relented and adopted a more dovish tone. Since then signs of further easing have boosted shares and bonds and vice versa.
At the most recent rate-setting meeting of the Federal Reserve at the end of July, the message was harsher than the market expected and shares fell. The quarter point rate cut was just a mid-cycle correction and not the start of a more significant easing cycle, the Fed said.
Mr Powell will have to do better tomorrow if he is to avoid another market wobble. One of his Fed colleagues wrote in the FT today that he should start providing some clear forward guidance on future rate policy to reassure the markets that rates will stay low until inflation is sustainably above target.
We all know what the President thinks. He regularly tweets that the Fed should be cutting rates harder and faster than it is, although he is hardly an unbiased observer. With an election looming next year he is desperate for a short-term boost for the economy even if it is not the right thing to do in the longer term.
There’s a mismatch between what the President thinks and what the Fed chair and some of his colleagues believe. Indeed, this week’s minutes of the last meeting showed that a number of rate-setters think the US economy is strong enough to handle rates at their current level.
There were clear divisions on the panel in July, however, with others arguing for an even bigger cut - of half a percentage point rather than the quarter that was delivered.
And there’s a clear divide between what the Fed thinks and what the markets are pricing in. At the latest publication in June of the so-called dot plots, which point to rate-setters’ expectations, it was clear that the Federal Reserve is looking at only a couple of cuts this year, including the one that we got last month. The market is looking for a full percentage point cut by the end of 2020.
Why do interest rates matter so much? Well they are the principal tool for the Fed to stimulate or restrain the US economy. The short rates set by the Fed drive the longer rates which are used to price mortgages and the loans that businesses take on to fund their investments. Rate cuts quickly feed through into easier conditions and more economic activity.
Whether the Fed is about to cut rates further or wait and see how the economy pans out first is incredibly important. And just as important as the Fed actions is how it describes its thinking.
So, with precious little else for investors to focus on this Bank Holiday weekend, Jackson Hole is the main event. Fingers crossed that Mr Powell chooses his words wisely.
Important information The value of investments and the income from them can go down as well as up so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.