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This article first appeared in the Telegraph.
IT is hard to imagine a less appropriate place to discuss the challenges of inequality than Jackson Hole, Wyoming. The ski resort in America’s mountainous north west sits in Teton County, which it was revealed this week has the nation’s highest per-capita income from assets, about 20 times the national average at $161,400.
A playground for the wealthy, Jackson is also the most economically unequal city in the US, with the average income of its top 1% residents just shy of $20m, or 213 times that of the bottom 99%. It makes the Bridgeport-Stamford area of Connecticut, where many of America’s hedge fund elite live, seem positively egalitarian, with an equivalent ratio of just 74.
So, it is perhaps fortunate that this year’s Jackson Hole central bank symposium was at the eleventh hour downgraded to a one-day, virtual event by a late change in Delta-related health and safety regulations. The main topic of discussion remains ‘macroeconomic policy in an uneven economy’ but the irony of a group of rich people discussing how to create a more inclusive and sustainable world will be less obvious on Zoom.
The Jackson Hole summit is a kind of offsite for the Federal Reserve. It’s an opportunity for central bankers, academics and the media to get together to share ideas about economic and financial risks and, in particular, for the chairman of the Fed to guide the markets on any changes in policy direction. Ben Bernanke used the event to set out the Fed’s proposed use of ‘alternative policy instruments’ (things other than changes in the interest rate) in 2010 and ever since then investors have briefly tuned in from the beach to hear the message from the mountain.
Tomorrow’s meeting will be watched even more closely than usual because just 18 months on from the devastating arrival of Covid we are now starting to talk about applying the policy brakes again. Since the start of the pandemic, the Fed’s balance sheet has more than doubled to $8trn and it is not alone. The ECB has spent a total of €8trn on asset purchases and the Bank of Japan and Bank of England have joined in the spending spree. As the House of Lords economic affairs committee pointed out recently, we are in danger of becoming ‘addicted’ to creating money.
This is obviously unsustainable, and the minutes of the Federal Reserve’s July rate-setting meeting indicated that we are indeed approaching the point when the punch bowl starts to be taken away. Markets hate this statement of the bleeding obvious. In 2013, the very mention of a reduction in stimulus triggered a notorious ‘taper tantrum’ while the modest raising of interest rates by the Fed in 2018 sent the stock market into a swoon that was only stabilised when the central bank returned to its policy of appeasement.
There is a strong case to be made for acting now, with one well-regarded Harvard economist, Jason Furman, saying recently of America’s July employment data: ‘I’ve never before seen such a wonderful set of economic data’. The unemployment rate fell last month to 5.4% and job vacancies stand at a record 10m. If not now, then when?
The second part of the Fed’s mandate, controlling inflation, also calls for action. Although the rate of prices growth did not accelerate any further in July, it still stands at 5.4%, way above the Fed’s target. Producer prices are growing even faster, and a persistent theme of the recent blockbuster second quarter earnings season was the increasing pressure on margins from rising costs and the disruption to global supply chains caused by the rapid rebound in economic activity. Some 350 ships, holding around 2.4m of those ubiquitous big metal boxes, are currently waiting at sea to get into various ports around the world. About one in 20 of the world’s container ships is sitting idle at the moment.
So, what will chairman Powell actually say tomorrow? It would be unwise to expect a big shift in policy to be unveiled. That is not his style. He prefers a glacial approach, and indeed he said in July that the Fed would provide ‘advance notice’ of a formal announcement of tapering. The Kremlinologists at Goldman Sachs think there is a 45% chance that the formal announcement will come in November, leaving the September Fed meeting free for the pre-guidance. This week might, therefore, be Powell’s opportunity to give fair warning of next month’s advance notice of November’s announcement. The days of the Fed surprising the markets are long gone.
Powell is right to tread carefully. Quantitative easing has, over the past dozen years, significantly raised the stakes of US monetary policy. Measures that have pumped up risky assets and distorted housing markets around the world should not be reversed without great care and clear forward guidance. A ten-fold rise in US Covid infections over the summer could yet make September look like an awkward time to unveil a reduction in stimulus.
The Fed is also right to focus its attention on the uneven recovery from the pandemic. Covid has clearly affected different demographic groups in very different ways. The rebound has been uneven in sector terms too, with goods production and housebuilding already back to pre-pandemic levels and constrained only by supply bottlenecks. Face-to-face businesses and those affected by the collapse in office demand remain depressed. Achieving maximum employment is not as simple as it once was.
We might hope for some excitement from Mr Powell but we should perhaps be careful what we wish for.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. 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 a Fidelity adviser or an authorised financial adviser of your choice.
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