This year’s Jackson Hole Federal Reserve conference was a decidedly low-key affair given Ben Bernanke’s absence (and Janet Yellen’s successful effort to not make news). Nonetheless, there look to have been a few takeaways of note.
We’re ready, aren’t we? Central bankers at the conference went to great length to convince markets (and themselves) that they were ready for the possible market turbulence that could follow the Fed reducing asset purchases (tapering). A few Fed governors did comment on the timing of tapering, repeating known positions. Atlanta Fed president Dennis Lockhart said that he would support tapering in September if the expansion held up, while St. Louis Fed president James Bullard wants to see more data before making a decision. I personally am not convinced that small taper in September would unsettle markets (it’s mostly priced in) but until it happens the U.S. and global implications of the move will worry policymakers. There were the usual calls for global coordination around the exit from these policies, but besides a paragraph in the upcoming G20 Communique I am hard pressed to think of how policy would change in practice.
Have we lost confidence in asset purchases? Not yet. A paper by Arvind Krishnamurthy and Annette Vissing-Jorgensen on the effects of asset purchases and sales drew significant attention. They argued that asset purchases–specifically US Treasury purchases–are contributing relatively little to the current expansion (MBS purchases pack more punch). In particular, positive effects on the economy from reducing interest rate premia in US Treasury markets are oversold when such risk premia are already negative. Consequently, they argue, Treasury sales will have little effect on markets. Their paper apparently drew a lot of pushback, on both analytic and empirical grounds, and doesn’t appear to have changed minds. But it is consistent with a growing view that the effects of purchases alone are diminishing, and a greater focus on the importance of communication/forward guidance alone or in conjunction with purchases.
Is this 1997? Concerns about emerging markets were front and center. After much complaint over the past few years about quantitative easing, the irony of emerging market central banks wringing their hands about what happens when the Fed exits was not lost on the conference. It is right though to be concerned. In a number of countries--notably India, Indonesia, South Africa, Turkey, and Brazil--large current account deficits and weak macro policies have created significant risks of deleveraging and capital outflows that are rattling emerging market investors and policymakers alike. But are we on the cusp of a major emerging market crisis? Some argued yes, notably Carmen Reinhart: “It could get very ugly…Emerging markets had a capital flow bonanza lasting several years, the golden boom years, and the probability of a banking crisis, the probability of a currency crash, the probability of a default, all increase afterward.”
This fear is prospective, not an assessment of events so far, a point made by New York Fed staffer Terrence Checki: “The sell-off, including renewed pressure in recent days, remains within the range of other sell-offs which the emerging markets have successfully weathered in recent years.”
Central bankers from emerging markets called for more aggressive efforts to avoid crisis, but beyond IMF programs and macroprudential controls there didn’t seem to be any big ideas.
The conference proved far less significant as a news maker and market mover than in past years, but as a barometer of policymaker’s concern and anxiety it still has something to tell us. Given the range of global risks, political and economic, that we are likely to face this fall, they are right to be concerned.