Submitted by Nicholas Colas of DataTrek Research
Fed Chair Jay Powell spent 5 paragraphs of his Jackson Hole speech on Friday explaining why Alan Greenspan was right to keep rates low from 1995 to 1999. If you want to know why US stocks rallied to fresh highs on his talk, that’s pretty much all you need to know. But if you want the deep dive into the whole conference we have a fuller summary of Powell’s talk below, along with highlights from all the other presentations.
Powell: The Fault Lies In Our Stars
Equity markets like the cut of Fed Chair Powell’s jib, at least as far as that nautical reference relates to his Friday morning comments at the central bank’s annual Jackson Hole conference. The S&P 500 finally broke to a new high and the NASDAQ similarly printed a new high water mark. Also, emerging market ETFs (like EEM) rebounded 1.9% on Friday pointing to some spillover potential at the start of Sunday night’s overseas trade.
Another maritime analogy was, in fact, at the core of Powell’s speech and its message was clearly equity-friendly. He compared long run macro economic concepts about unemployment (called “u star” by econo-wonks), interest rates (“r star”) and inflation (“pi star”) to the physical stars once used for celestial navigation at sea. His summary about this:
“Navigating by the stars can sound straightforward. Guiding policy by the stars in practice, however, has been quite challenging of late because our best assessments of the location of the stars have been changing significantly.”
The Fed Chair then shifted to dry land, and a concept investors use every day: risk management. Once you accept that your perceptions of reality may be wrong (the stars aren’t where you think they are), you build more uncertainty into your decision-making. Powell took 5 paragraphs of his talk to praise former Chair Greenspan’s do-nothing stance on rates in the mid-late 1990s as an example of sound intellectual risk management. Inflation was waning at the time, although many economists thought it would return with a vengeance. Greenspan, to Powell’s thinking, was wise to watch and wait.
If you want to pinpoint the one section of Powell’s talk that buoyed US stocks on Friday, his lauding of Greenspan’s inadvertent fueling of the late 1990s dot com bubble clearly qualifies. Yes, he did highlight that the past two recessions (2000 and 2008) saw “destabilizing excesses” and appeared “mainly in financial markets rather than inflation”. But there is no mention in his talk that current financial market conditions show any similar excess. This will either prove to be Powell’s first sin of omission as Chair or a great market call. Only time will tell.
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While the rest of last week’s Jackson Hole conference will probably get little attention, the topics presented do outline a worldview sympathetic to a structurally go-slow Powell Fed. Here are brief summaries of each talk:
Increasing Differences Between Firms; Market Power and the Macro-economy
- There is rising industry concentration across many major industrial sectors in the US and EU.
- Larger firms are growing more profitable than smaller peers but the rewards are not flowing through to workers.
- The root cause may be an increasingly “winner take most/all” dynamic due to globalization/new technologies, rather than regulatory/policy failures.
Understanding Weak Capital Investment: The Role of Market Concentration and Intangibles
- Capital investment is not weak, as commonly thought. Rather, firms are investing in intangible assets like R&D, software and business processes.
- These intangible assets can provide powerful competitive advantage and even enable a rise in industry concentration.
Panel on Changing Market Structure and Implications for Monetary Policy
- There is very little academic research on how monetary policy makers should consider industry concentration in setting interest rates.
- FinTech, a relatively new entrant in the market for financial services, may actually exacerbate wealth inequality by using Big Data algorithms to prey on less-educated consumers.
Reflections on Dwindling Worker Bargaining Power and Monetary Policy
- Lunch presentation by Alan Krueger (Princeton and NBER). US wages are not growing as quickly as corporate profits due to structural factors, ranging from lower levels of unionization to the increasing use of anticompetitive practices on the part of employers.
More Amazon Effects: Online Competition and Price Behaviors
- The growth of Amazon over the last decade has pulled US consumer prices lower in much the same way as Walmart’s growth in the 1980s/1990s reduced structural inflation.
- Because Amazon’s prices are easily visible, other retailers quickly follow any changes there (usually lower) in pricing across a wide variety of goods. This give Amazon more influence in price-setting than its market position would imply.
- Since Amazon charges one price nationally, this limits retailers’ ability to differentiate prices by region.
Competition, Stability and Efficiency in Financial Markets
- Financial system regulation typically focused on cross-cycle stability (i.e. making sure banks have enough capital to withstand a severe recession without the need for government bailouts).
- Policymakers need to consider the role of technology as financial services industry “disruptor” and create a regulatory framework to ensure the system remains stable.
Overview Panel (no unifying topic)
- The current global debate over trade/tariffs could be damaging to the global economy.
- The current boom in technological disruption is analogous to the last big macro trend of globalization. Policymakers need to explain the benefits of this shift to their citizens and address those left behind.
- Among the final lines from the final speaker at Jackson Hole this year: “Digital technologies are disrupting central banking along with everything else.”
Summing up: Jackson Hole 2018 is the year the Federal Reserve accepted that the world really is different from 10 or 20 years ago, thanks to everything from technology to a changing political landscape. How much that realization dulls their appetite for aggressive monetary policy is now as important a question as where CPI or inflation goes in the next few years.
For links to all the papers presented and their authors (omitted from our summaries due to length constraints, click here: https://www.kansascityfed.org/publications/research/escp/symposiums/escp-2018