“New normal”: what to expect from a meeting of Central bankers in Jackson hole

On Friday, August 26, in the mountain resort of Jackson hole (Wyoming) kicks off the annual three-day conference with participation of heads of major Central banks in the world, respected analysts and economists. The event is organized by the Federal reserve Bank of Kansas city. At the conference we discuss current problems of the global financial system. This year the theme of the conference is stated as “Development of sustainable monetary policy of the future.” This time Davos for Central bankers, as it is sometimes called the Symposium in Wyoming will be waiting for signals from the fed about the timing of monetary policy tightening and in the atmosphere General search for alternatives to near-zero rates of Central banks, which have not been sufficiently effective.

When lifting?

All the markets ‘ attention will be drawn to Friday’s speech of the fed Janet Yellen, which will probably give a hint for the future plans of the fed on monetary policy, namely the timing of the rate hike. At the end of last year, the fed raised the rate for the first time in a decade, with a record low of 0-0. 25% by 25 basis points. At that time, the US economy seemed to be fed so much stronger after the crisis, in 2016, the Central Bank had planned to raise the key rate four more times. However, as long as the fed refrains from raising rates due to global economic slowdown, domestic macroeconomic data, which was weaker than expectations, and increased uncertainty associated with events such as Brexit or presidential elections in the United States.

At its last meeting in late July, the fed explained the immutability of the key interest rate by the need to support the strengthening of the labour market and the desire to achieve the inflation target of 2% per year. The rate of price growth, which is focused on the fed in recent months kept at level of 1,6% and a rate increase could further delay the inflation of the landmark fed. Published last week, the Protocol of the July FOMC meeting showed that the views of the officials of the fed about when to raise the base rate, were divided: some FOMC members believe that the time to raise rates is now, their opponents — it is necessary to wait.

In 2016 there are three meetings of the fed — in September, November and December. Last week the head of the Federal reserve Bank of Atlanta Dennis Lockhart said that the quite likely scenario of the two increases in rates before the end of the year, including at the next meeting in September. But markets in such a scenario rather not believe: according to the market of futures for rate FRS on the evening of August 24, the probability that the rate will be raised in September, is estimated at 30% in November and 36% in December and 55%.

As stated by Reuters, Barclays economist Michael Gapen, Yellen is able to use his speech in Jackson hole in order to give a clear signal that the rate will be increased in the coming months, if the United States will remain high the rate of employment growth. The last time the fed in 2013, announced the beginning of tapering of “quantitative easing” (QE), the markets started the unrest — the price of sovereign bonds fell, volatility in emerging markets has jumped. Statements in Jackson hole can be a “trigger” of new sales in the bond markets, wrote in mid-August, Michael Hartnett of Bank of America Merrill Lynch.

If Yellen does not sound a clear signal on future fed action, the dollar will decline, said the survey by BNP Paribas published this week. But if the fed Chairman will hint at a rate hike in September, the dollar will be significant potential for growth is the baseline scenario of the BNP. In a September rate hike and analysts believe Barclays. As chief economist of ING Bank in Russia and the CIS Dmitry Polevoy said that if the tone from Yellen will attest to the fact that the rate hike possibly before the end of the year, it can cause the adjustment to global markets to strengthen the dollar, adding negative oil quotations.

The ruble may continue to weaken, however, a serious decline in the exchange rate can be expected — the Russian currency will continue to trade in the wide corridor 63,5–67,5 rubles per dollar, close to its upper bound. If it’s Yellen will not change the current expectations, the ruble is likely to remain at the same level or a bit stronger — the search for earning assets market participants will continue, and Russia in this plan is very good, said Field.

This is the new normal

The more global topic of discussion in Jackson hole will be a discussion of the reasons why Central banks by and large have been unable to achieve their goals — to strengthen economic growth and accelerate inflation to the targeted levels — using traditional tools. In a situation of future economic turmoil from Central banks will certainly be little space for maneuver, if we do not find alternative tools, writes The Wall Street Journal.

In January the Bank of Japan lowered interest rates on deposits to -0.1%, the ECB is in the spring set a zero key interest rate and announced the launch of the second program of “quantitative easing”, Bank of England, responding to Brexit, in early August started the implementation of the expanded programme of QE and lowered its key interest rate to 0.25%. The Central banks of Sweden, Norway, Australia and New Zealand over the past year, also followed the ultra-loose monetary policy. According to estimates, the S&P Global, the country, where there are negative interest rates of Central banks, accounts for 25% of global GDP.

A key concept in the debate on the effectiveness of Central banks is the so-called neutral rate (R*), the optimal interest rate at which the GDP is growing steadily and there is no risk of overheating inflation. Since 2007 this rate decreased in the United States, Canada, the UK and the Eurozone 1-2. 5 percentage points in the United States it is now estimated at 3% (versus 4.5% before the global financial crisis), the WSJ writes, citing a recent study by the Federal reserve Bank of San Francisco.pdf). The fundamental reasons for the decline is low productivity, an aging population, increasing inequality (and, consequently, increased the share of the savings of wealthy citizens), reduced risk appetite from investors around the world. The decline in the neutral rate means that the fed and other Central banks have less potential for impact on the economic situation.

“The decline in the neutral rate means that current monetary policy is not as stimulating as I had expected”, explains in his article, former fed Chairman Ben Bernanke. In such circumstances, the increase in the base rate, the fed looks less urgent task, even for those members of the Federal reserve who are supporters of tight monetary policy,” Bernanke indicates. The financial system is waiting for a “new normal” rates at the level of 3-3,5% in the long term (compared to 4-4,5% before the recession), adds in his article the head of the Federal reserve Bank of San Francisco John Williams. And in terms of lower neutral rates, traditional methods of “heating” of the economy by reducing base rates don’t work anymore, says Williams.

The solution may be a return to fiscal stimulation of the economy — increasing investment in education, the use of fiscal incentives for investment in infrastructure, writes in the Financial Times, former Treasury Secretary Larry summers. In support of the fact that for economic recovery it is necessary to increase budget expenditures, expressed Yellen and three other fed members. Given that the fed tries to refrain from the effect on fiscal policy, such statements can be interpreted as signals of future US President and Congress about what tools the Central banks is limited and will now have to rely on him less.