Jackson Hole 2018 starts today and the topic is a real cracker!

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The Jackson Hole economic symposium begins today (US time).

Most speculation surrounds US Fed Chair Jerome Powell's upcoming comments on Friday, and thereafter whether he will continue to defy Donald Trump with further rate hikes. But like most prior symposiums, major announcements are unlikely to happen.

What's of more interest is the topic for the conference: "Changing Market Structure and Implications for Monetary Policy". Interesting, but what does it mean?

A quick scan of the Kansas City Fed's website reveals a number of the topics that will be discussed, amongst others, including:

  • Dynamics that have contributed to shifts in productivity, growth and inflation.
  • Increasing economic activity of large multinational corporations and market concentration in many industries, resulting in decreasing competition.
  • Linkages between these factors and observed structural changes in the global economy, including lower capital investment, a declining labor share, slow productivity growth, slow wage growth and declining dynamism.
  • Consumer market place changes from technology/consumer behavior with emerging new markets which may be altering pricing behavior of firms in an increasingly global marketplace and limiting the ability of firms to raise prices in response to rising demand.
  • Evolution of new pricing behaviour driving new inflation dynamics and in turn suggesting  monetary policy transmission mechanism within and between countries may change as well.

These factors build on observations made by Dallas Fed Chief Robert Kaplan at last year's symposium, when he spoke of the anti-inflationary aspect of ‘structural’ technological disruption.

That is, more tech, less people, less jobs, lower wage pressures plus the double-whammy of cheaper prices for consumers.

It will be interesting to see if and how these thoughts have evolved amongst the Dallas and other Fed Reserve branches, and amongst other Central Bankers - and whether a new interpretive model for 'gig-economy inflation' starts to emerge, and the changing role inflation might play in setting monetary policy.

However, even if 'technological disruption' has provided some buffer to households against increasing short term interest rates, there could be a raft of other reasons why short term rates might not get pushed too high, too soon in the US.

One reason is that there is currently only a 0.43% differential between US 2 year and 10 year treasury yields. So, if sluggish future growth expectations in the US keep the 10 year yield pinned at current levels, it would only take 2 more short term rate hikes (0.25% each) to flatten out/invert the yield curve.

Inversion is generally a recessionary predictor and clearly something the Fed and the White House will be wanting to avoid.

So in summary, there is potential for the topic chosen for this year's symposium to showcase a new model for understanding the effects of 'gig-economy inflation' and the weight it might be given when setting monetary policy, not just in the US. We'll have to wait and see.

But even if this way of thinking is embraced and emboldens some of the Hawks, US short term rate hikes may need to be contained to 2 or 3, if future expectations keep the 10 year yield rooted at current levels. 

Mike


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