Don’t read this! You’ve read too much about Jackson Hole.


The level of hype ahead of the annual central bank symposium in Jackson Hole, Wyoming, is even more intense than usual, and it’s easy to see why. The United States is battling the worst inflation in four decades, and investors are eager for clues about the Federal Reserve’s next moves. But history shows that all the hubbub is overblown, and the real direction of the markets will come from the economic data released over the coming months.

By the numbers, Jackson Hole is almost never the pivotal moment it’s supposed to be. Over the past decade, the S&P 500 has lost an average of 0.2% on the day of the Fed’s keynote speech (usually the President’s speech). The index was typically up 0.5% after five days; 0.1% after 20 days; and 4.5% by the end of the year, starting on the day of the speech. In other words, typical moves are less than one standard deviation and there isn’t much dispersion around the mean. The president’s speech is usually not much.

The biggest one-day rally of the period came last year when Fed Chairman Jerome Powell encouraged markets by saying personal consumer spending inflation, then at 4.2% , was “likely to prove temporary” and that interest rates close to zero remained appropriate. It was an unusually tradable message as the markets extended their gains through the end of the year. But he was also woefully incorrect in his diagnosis of the problem, and Powell ended up paying for his initial reluctance to respond. At present, the market has returned all of these gains.

The fiercest of the selloffs was the 2.6% one-day drop in 2019, but it wasn’t really Powell’s talk that did the damage. He declined to provide further forward guidance and delicately validated the market’s already dovish expectations. Always at the forefront, President Donald Trump stole the show in part by criticizing the Fed’s inability to cut rates faster and also threatening China on Twitter in a brewing trade war. It was Trump who upset the trading session, not Powell.

The 44-year-old conference founders would likely find the hysteria something to do. The Federal Reserve Bank of Kansas City started the symposium in 1978 with an initial focus on global agricultural trade, and it has grown in popularity since moving to Jackson Hole in 1982, with former president attendance. of the Fed, Paul Volcker, that year. The data shows that major news outlets produced more stories about Jackson Hole ahead of the event this year than at any other time in the past decade.

Certainly, the extra plot makes sense. Headline inflation may have peaked, but there remains much uncertainty about how fast it will decline – and by how much. It remains unclear how the Fed will react if inflation gets stuck in the 3-5% range next year and the economy slips into a deep recession.

Of course, Powell might be pressured to bring out his inner hawk. The Fed relies on the markets to effectively convey its policies, and financial conditions have eased significantly over the past couple of months, though much of that is down to what happened with currency spreads. corporate bonds and stocks – fed funds futures and short-term bonds seem to be more or less where policymakers would like them. At the same time, mortgage rates are rapidly cooling the housing market and risk triggering home equity losses, so the hawkish jaw will require some nuance. Without implying a higher terminal rate, Powell could achieve some tightening by pledging to keep rates high until 2023 or until the Fed reaches a milestone in the fight against inflation.

But don’t expect Powell to shock the world on Friday. Economic data on growth, inflation and employment will prove to be the real catalysts until the end of the year. A significant widening of the disinflationary trend over the next two months could change the market narrative, as would any sign that wage growth is slowing and will not remain a lasting bullish force on inflation. As for Powell, he is likely to follow the great tradition of the Jackson Hole symposiums and not rock the boat. Would he accept a slight and gradual tightening of financial conditions? Absolutely. But the last thing he wants is to stage a crash, and he’ll err on the side of delivering a lukewarm nothing if that’s what he thinks is needed.

More other writers at Bloomberg Opinion:

• Jerome Powell fights inflation — and wins: Karl Smith

• Powell will face a tough crowd in Jackson Hole: Bill Dudley

• Fed Forward Guidance Increases Volatility: Gary Shilling

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.

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