Episode 12 - Jackson Hole
This is The Bankster Podcast, and I’m your host, Alexander Bagehot. Today is Episode 12 - Jackson Hole. Every episode we dive into the intricate world of central banking! I use one or two pieces of news from the Federal Reserve or monetary policy from around the world to summarize, translate, and explain a few points from the Centralverse. Now the Centralverse is the deep, the fascinating, the ever changing, and the incredibly consequential world of central bankers and the economies they attempt to support.
I went to high school in a small town in the Snake River Plain in Eastern Idaho. Every Sunday, on the way to church, my family would make our way out of the small valley that our neighborhood was tucked into and up the hill to the chapel. If the air was clear, which it normally was if it wasn’t planting season or potato harvest, you could see a beautiful mountain range to the East as you came up and out of the valley. One peak of the mountain stood above the rest, the Grand Teton. It’s a breathtaking view and if you sign up for the show notes on my website I’ll include pictures in next week’s email.
It was during my high school years that I began to have an interest in economics and the finance world. One of my best friend’s dad was an investor, I followed current events as a faithful reader of TIME magazine, and I began to consider a career in finance. Little did I know that just on the other side of the Grand Teton some of the greatest minds in the Centralverse were gathering every summer, just before I would go back to school, to discuss the latest in monetary policy. Central bankers from the Federal Reserve as well as their counterparts from all over the world discussed and debated to the backdrop of my home town mountain range from the Wyoming side.
In today’s episode I’m going to review a few key takeaways from an important speech at this year’s Federal Reserve Bank of Kansas City’s Jackson Hole Economic Policy Symposium that was held last week. I’ll also take a closer look into the history of the Symposium. So let’s start with the biggest news in the Centralverse this week.
Janet Yellen, chairwoman and leader of the Federal Reserve, opened the first full day of the Jackson Hole Symposium with an important speech. As I read the speech I couldn’t help but smile. I’ve read and listened to hundreds of speeches by Central Bankers – especially in the last decade or so. And I was smiling because I noticed that the notes I was taking as I was reading weren’t specific enough and could honestly have applied to just about any of the past dozen speeches that I’ve read. There is definitely a pattern to the speeches of Central Bankers since the Great Recession. So I thought this speech by Chair Yellen would be a perfect opportunity to break down and explain what a Centralverse speech looks like these days. So hopefully by the end of today’s podcast you’ll not only have an understanding of what the theme and message from the symposium in Jackson Hole was, but you’ll also have a framework for how speeches on this level are written. Then when you hear Centralverse leaders speak over the next few months you’ll catch the patterns and be able to recognize more quickly when something is changing. So let’s jump into the speech, and there’s no better place to start then with the title.
When a Centralverse leader is writing a speech they have to be conscientious of the wide range of backgrounds in the potential audience (and as we’ve learned the audience whenever central bankers speak is as varied as journalists to academics, politicians to small business owners, and corporate CFO’s to a couple purchasing their first home). Nowhere is this attention to audience more evident than in the title. This speech is called, “Designing Resilient Monetary Policy Frameworks for the Future”. It’s readable – even if you don’t know much about economics. But it also isn’t a clickbait title that would fly on BuzzFeed. This symposium is famous worldwide so the audience included high ranking central bankers, top academics, and the journalists in attendance would broadcast the message to markets, governments, and people everywhere.
After a brief introduction most Centralverse speeches begin with what is called an Economic Outlook. This is often the second most important part of the speech. And in every Economic Outlook the two most important economic indicators for central bankers are mentioned: (1) the unemployment rate, and (2) the inflation rate. In regards to the first Chair Yellen said, “Although the unemployment rate has remained fairly steady this year, near 5 percent, broader measures of labor utilization have improved.” And remember it’s always good to ask yourself what does this mean and why is it important. She’s saying that although the official unemployment number hasn’t changed very much, a closer look shows that there are improvements in other measures of employment. This is important because one of the main reasons for keeping interest rates low is to boost employment. She’s hinting here that the employment situation is getting stronger and maybe could withstand a rate increase.
For the other economic indicator she said, “Inflation has continued to run below the FOMC’s objective of 2 percent, reflecting in part the transitory effects of earlier declines in energy and import prices.” Here Chair Yellen focuses on one potential reason that the inflation rate is running below target – transitory effects. This is a hint that she believes inflation will begin to pick up after these temporary effects wear out.
From this speech we learn that Chair Yellen is viewing improvements in the economy and suggests that she is open to increasing the interest rate. But those are just guesses based on her interpretation of the current situation that the economy is in. The next topic that central bankers always cover is what they believe the central bank will do or should do in the near future to improve the economic situation – no matter what it currently is. This part is arguably the most important.
Sometimes the language is more specific and other times it is more vague. As we learned from earlier episodes on Centralverse communication – the trend over the last decade or so has been towards clarity. Chair Yellen followed this pattern as she said, “I believe the case for an increase in the federal funds rate has strengthened in recent months”. If you heard anything about the Jackson Hole Symposium this was most likely the line that you heard. I can tell you that I got four different cell phone alerts on that Thursday morning the speech was given with that direct quote. However, at this Hint for Future Action section of the speech there is always a disclaimer. This time around Chair Yellen phrased the disclaimer this way, “Monetary policy is not on a preset course.”
This disclaimer has been a staple ever since central banks began to open up more and be more transparent in their communications. They are now willing to talk about their thoughts about the economy and what they might do in the future – but they want it to remain clear that they are not bound to any specific action. If the economy changes they want everyone to know they will make a decision based on the most recent and relevant information – regardless of what they had said in the past.
There’s a great Latin term that economists and statisticians use whenever they are creating a mathematical model. It’s called ceteris paribus, which translates to all else equals. Whenever a central banker says what they think the central bank will do or should do it’s always good to remind yourself of ceteris paribus. They will do what they say if all else is equal or in other words, if nothing drastic changes in the economy. And with an infinite number of moving parts in the economy it’s a pretty big disclaimer that is often overlooked.
After the Hint for Future Action section the central banker normally moves on to discuss a Big Picture question or economic philosophy. At Jackson Hole, Chair Yellen discussed the current set of monetary policy tools. I won’t go into too much detail right now on the specifics but she summarized what tools the Fed had before the recession and what tools it acquired during and after the recession.
This is very common – the Centralverse changed dramatically because of the Great Recession, so most speeches make some kind of comparison to the pre and post Great Recession world. Some of the new tools that she focused on in this speech were: paying interest on reserves and excess reserves, the overnight repurchase agreements, quantitative easing, and forward guidance. If you’ve listened to past episodes hopefully you understand what at least a few of those things are. I promise I’ll cover each one in more detail in the future. Another thing that Chair Yellen did in the Big Picture section that is a staple in most Fed speeches is remind the audience that the Great Recession would have been immeasurably worse if the Fed hadn’t used all of these new tools.
The speech was a classic Centralverse speech on lots of levels and I encourage all of you to pay attention to upcoming Centralverse speeches and see if you can catch some of these patterns and themes. At the end of every speech I like to ask myself, “For the person speaking, is this consistent with what they’ve been saying? Is it a move closer to tightening monetary policy – which means raising rates? Or is it a move closer to loosening monetary policy – which means lowering rates?” Chair Yellen’s speech definitely was a move towards tightening.
So now that we’ve dissected one speech from the symposium let’s take a few steps back in time and learn about the history of this gathering of the Centralverse.
The Economic Symposium in Jackson Hole, Wyoming began in the late 1970’s. It started as a conference on the economics of agriculture with titles such as “World Agricultural Trade” and “Western Water Resources”. However, in the early 1980’s the conference lept onto the world stage. For the 1982 symposium nearly 100 economists gathered beneath the Grand Tetons to discuss a much wider reaching topic, “Monetary Policy in the 1980’s”.
Paul Volcker was the Chairman of the Federal Reserve at the time and if you remember from Episode 8, inflation had been running out of control for much of the 1970’s. In order to put a lid on the inflation and push it back to healthy levels Chair Volcker decided to let interest rates rise as high as they needed to go. These high interest rates sunk the economy into a brief recession, and the Federal Reserve was under immense pressure from all sides to change its policies.
Chair Volcker, hoping to escape the Washington heat for a few days in August 1982, decided to attend the newly branded symposium put on by the Kansas City Fed and hopefully do some good fly fishing - this area of the country is to this day one of the prime locations for fly fishing in the world. The symposium welcomed economists and central bankers from all sides of the argument, and the conversations and presentations were often intense.
It didn’t turn out to be quite the break Chair Volcker had been hoping for, but it did turn out to be an excellent stage for debate and discourse. It was from this new platform that the symposium would move forward into the years and decades ahead and even up to last week’s gathering.
“In Late August” is the name of a great article written by the Kansas City Federal Reserve about the history of the Jackson Hole Economic Symposium, and was the main source for today’s history section. I’ll wrap up by reading a few paragraphs from the article that nicely summarize the importance of this annual Centralverse conference.
When eastern bloc nations turned away from communism and toward capitalism, their central bankers would come to Jackson Hole to engage the West. It would be here where Alan Greenspan would give a speech defending the Fed against the idea that monetary policy could be used to prick a tech stock bubble.
It is where, in 1999, Mark Gertler and then-Princeton professor Ben Bernanke would present a paper titled “Monetary Policy and Asset Price Volatility” that would still be referenced more than a decade later with Bernanke as Fed chairman. Perhaps to the surprise of some, the event would become a place where critics of central bank policies were able to not only voice those views, but discuss them more fully with central bankers.
“The Jackson symposium has had tremendous impact,” said Harvard University professor and President Emeritus of the National Bureau of Economic Research Martin Feldstein, who has been a longtime symposium participant. “This set of meetings really shapes thinking about policy. Some talk about a Washington consensus; I talk sometimes about the Jackson consensus.”
The list of those who have contributed to the policy discussions in Jackson Hole would grow
long and include leading central bankers such as Jean-Claude Trichet from the European Central Bank, those from developing and emerging nations such as Iraq, and leading academics and Nobel Prize winners.
In the show notes to today’s episode, which you can sign up for on my website, www.thebanksterpodcast.com, I’ll include links to Janet Yellen’s speech as well as all of the other speeches given at the symposium. I’ll also include a few pictures of the Grand Tetons from my home town in Idaho, as well as the Jackson Hole side. I’ll also summarize the key points of a Centralverse speech so you can be on the lookout for them over the next few months.
As always, send in your comments and questions about the Centralverse or the Bankster Podcast in general via email (email@example.com) or Twitter or Facebook. Open up your phone now and leave a review of the podcast on whatever podcast app you’re using to listen!
Today’s episode was written, edited, and produced by me, Alexander Bagehot. I dedicate this episode to my second family - Gaby and Mando, who picked me up just when I needed it the most. And to everybody else, thanks for listening. I’m Alexander Bagehot, and I’ll see you next time on The Bankster Podcast!