Central bankers said nothing at Jackson Hole – but markets knew what they meant

Central bankers Mario Draghi, Janet Yellen and Haruhiko Kuroda laughing together at Jackson Hole © Getty Images
Central bankers Haruhiko Kuroda, Janet Yellen and Mario Draghi decided to play it for laughs at Jackson Hole.

Markets spent most of last week waiting for Jackson Hole, the annual confab for global central bankers.

No one dared move, for fear that one of them would let something vital slip. Some vital clue that would tell investors where they should put their money now.

Mario Draghi might send the euro crashing. Or Janet Yellen send the dollar soaring.

Or Haruhiko Kuroda might decide it was time to shed the pretence and just buy every single piece of equity or debt that the Bank of Japan doesn’t already own.

(Mark Carney ducked out, perhaps aware that, even with his Clooney-ish good looks, he would not be the centre of attention).

What must it feel like to have the entire global financial system trembling every time you open your mouth?

I’m not sure – but Draghi and Yellen decided to play it for laughs…

A hilarity of central bankers

One of the major qualifications for being a good central banker is clearly to have a marvellous sense of mischief.

The US central bank, the Federal Reserve, is on the verge of unwinding the greatest monetary experiment since John Law mentioned to Louis XV that he might just have an idea for paying off the French national debt.

Janet Yellen, currently the head of the Fed, had a star turn at Jackson Hole. She was set to talk about financial stability.

Financial stability is, of course, something that markets are worried might vanish entirely once the Fed decides to embark on quantitative tightening (effectively “un-printing” money). That could happen as soon as next month.

So, naturally, Yellen didn’t mention a thing about her thoughts on what might happen next with monetary policy in the US.

Meanwhile, the European Central Bank (ECB) has seen the value of the single currency rocket against the US dollar since the start of the year. ECB boss Mario Draghi can’t be all that happy about that. It took him ages to persuade the Germans to allow him to do QE himself, and thus weaken the euro, which was the only way he could help the likes of Italy and Greece and all the other laggard states.

Now he’s got a juggling act facing him. On the one hand, he’d probably rather keep monetary policy on the weak side. The European economy is bouncing back, but that’s after an unprecedented slump – one that would certainly easily qualify as a depression in at least some eurozone states.

On the other hand, Germany’s already twitchy about loose monetary policy, so Draghi might be running out of room for manoeuvre. That could mean the euro continuing to get a lot stronger in the second half of this year.

That’s a tough task he has ahead of him. And it’s one that could affect the path of asset prices for the rest of the year.

So naturally, Draghi didn’t breathe a word about what he’s thinking as far as the path of eurozone QE or interest rates go.

Oh, how they must have laughed.

You say it best when you say nothing at all

To be fair, you can see why neither Yellen nor Draghi were keen to let anything slip about their views on monetary policy. One reason behind the paralysis in markets last week (apart from the fact that, being August, no one is actually at their desks), is that it’s pretty hard to figure out how markets might react to news of the next steps in “normalisation”.

The reality is that investors are keen on the idea of a more normal world. In an ideal universe, as a sensible investor, you want to operate with a decent margin of safety – a cushion between what you think something is worth and what you paid for it.

Nowadays, the idea of a margin of safety is gone. Nowadays, the best you can hope for is that if things go pear-shaped, you’d probably (but only probably) lose less money in this particular asset class than in that one, as long as you were lucky. Or that your portfolio is sufficiently diversified that everything collapses at the same rate.

That’s not a comfortable world to operate in. So any hint that “normalisation” is off the cards could well rattle markets right now.

Trouble is, investors also can’t work out how you get to a more normal world from the one that we’re in. Not without shedding an awful lot of excess value in the process.

So any hint that “normalisation” is going ahead could scare the horses badly. You can already tell from the tone of the commentary going around that most people have their trigger fingers on the “sell” button.

You’re at the stage in the toddlers’ birthday party where they’re all playing musical chairs and dancing with exaggerated care around the one seat remaining. Drop a careless hint that the music’s about to stop, and it’ll get messy. There’ll be tears. Maybe even a black eye or two.

So the easiest – and most sensible – thing for Yellen and Draghi to say was to say nothing. And that’s what they did.

The nice thing about markets is that they’re about people. When it comes to people, you can always bet on the path of least resistance. The only real trick is in working out exactly where that lies.  

The dollar is likely to stay weak until further notice (which could come on Friday)

So what now for markets? The next big hint – and one that can’t be fudged in quite the same way – is the US employment data, out this Friday. Very strong, and everyone will be expecting rate hikes again; very weak, and markets will relax about monetary policy tightening – but worry that we’re heading for recession.

In the meantime, markets appear to have decided that Yellen’s speech on Friday was akin to a resignation speech. She argued against rolling back financial regulation, something that Donald Trump has been in favour of.

Now Trump is hardly the most consistent guy. But let’s go with the idea that she’ll be replaced.

That’s likely to mean that Gary Cohn – currently head of the National Economic Council – will be the next head of the Fed. And markets rather like the look of him. He likes low interest rates, doesn’t like a strong dollar, and he’s got strong ties to Wall Street.

All of that might help to explain why – despite Draghi and Yellen’s best efforts to evade the topic – the US dollar has weakened and gold has surged in the wake of Friday. And I suspect that’s the trend we’ll continue to see until data or politics changes that.

  • Jonathan Lee

    is me or do they all look reptilian?