The ongoing Jackson Hole Symposium confronts central banks with a tricky mission.
As an illustration of the ambient unease, the ECB chair Christine Lagarde has been replaced by Isabel Schnabel and the Bank of England’s Andrew Bailey has decided not to issue a statement after the event.
Double-digit inflation is becoming widespread, labour markets are robust, financial conditions are improving despite monetary tightening, and economic data are slowly declining although advanced indicators are tumbling. Against this backdrop, central banks should reaffirm their determination to smash inflation and opt for higher rates over a longer period.
At the latest FOMC, the Fed was quite clear that it would react after economic data releases and abandon forward guidance which it considers to be unsuited to the current environment. The bank wants to anchor inflation expectations while recognising that monetary policy tends to lag the first encouraging signs of inflation. In Europe, the ECB has already acknowledged that its forecasting models might be inappropriate and that there is a risk of inflation de-anchoring. The bank will probably reinforce this message.
As a result, we should expect to see a show of determination coupled with some modesty over the surprising surge in inflation. Over the past few days, market positioning has reflected these points. We are unlikely to see the Fed shedding much more light on the situation but perhaps the ECB will say more.
Article written by Laurent Benaroche, Fund Manager Multi Asset & Overlay at Edmond de Rothschild Asset Management.