Since 1978, Jackson Hole has established itself as one of the biggest global economic events of the year marking, on numerous occasions, the monetary policy agenda that, structurally, is desired and will be followed. In a year like this 2022, in which the inflation has become the main enemy to beat, the meeting organized by the Kansas City Fed from August 25 to 27 has become the appropriate forum to find out in detail what the planned plan is and how it wants to be implemented, coexisting on this occasion the messages that you want to convey about the evolution of interest rates to the gradual reduction, or not, of the Fed’s balance sheet. The decisions adopted and the perspectives on withdrawals of liquidity, as well as the new measures to be adopted, set the agenda for next year being able to eliminate part of the uncertainty or generating, depending on the aggressiveness with which it is considered necessary to fight inflation, a new rebalancing of positions.
For now, especially in the last month, as has been reflected in both the valuations of equity and fixed income assets, the perspective is that it will not be necessary to intensify the increases. The truth is that the conjunctural component of inflation is tending to decrease, it being logical that, if this trend continues and, above all, after the changes from inflation targets to variable that were made last year, attempts will be made to avoid as much as possible a significant increase in the cost of new issuesas well as distortions in the credit markets, which determine an even greater slowdown than expected.
Although in terms of interest rates the message must continue to be one of prudence and, therefore, although with downward nuances, expectations of increases continue to be maintained, it is logical to think that a certain relaxation will be transmitted regarding the urgency , although the possibility of acting quickly if necessary is left open as a message to the market. The main question will be in the QT (process of reducing the size of the balance of the Federal Reserve).
The Wall Street Journal. Aaron Back
QT decisions depend on expectations on the absorption capacity of the market, that is, of its real liquidity, which, let us remember, is not particularly high at the moment, among other reasons due to the lack of visibility of the macro scenario that we are going to face. A clear or relatively clear idea about the position of the different central banks should help. For the moment, the market wants to understand that the withdrawal processes are not going to speed up under any circumstances, but of course, it would be positive to confirm this and be clear about a variable that has been left in the background this last year due to the need to increase interest rates.
Different documents recently published by the Fed show how the reduction of the balance sheet could have very negative consequences on the market, triggering a sharp increase in interest rates. Specifically, there was talk that a reduction of 2.2 trillion dollars in three years would mean an increase in prices of 76bps. Three times what was expected in a normalized liquidity environment. Apart from the effect on governments, we should take into account the disruption that it can cause in the credit markets in the face of a break not only in liquidity, but also in the trustwhich could lead to a sharp reduction in positions.
For now, a tense calm after the recovery experienced this last month due to a gradual stabilization of inflation that, we hope, will be confirmed, although It will depend on whether the geopolitical environment and the evolution of trade (we will begin to know business results shortly) allow it.. For now, the first rebalancing seems to be over.
Since 1978, Jackson Hole has established itself as one of the biggest global economic events of the year marking, on numerous occasions, the monetary policy agenda that, structurally, is desired and will be followed. In a year like this 2022, in which the inflation has become the main enemy to beat, the meeting organized by the Kansas City Fed from August 25 to 27 has become the appropriate forum to find out in detail what the planned plan is and how it wants to be implemented, coexisting on this occasion the messages that you want to convey about the evolution of interest rates to the gradual reduction, or not, of the Fed’s balance sheet. The decisions adopted and the perspectives on withdrawals of liquidity, as well as the new measures to be adopted, set the agenda for next year being able to eliminate part of the uncertainty or generating, depending on the aggressiveness with which it is considered necessary to fight inflation, a new rebalancing of positions.