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John Chatfeild-Roberts: A new dawn for monetary policy?

With the US, UK and ECB set to lose their central bank heads within two years, are successful reforms at risk?

August saw the annual symposium for central bankers, hosted by the Federal Bank of Kansas, at Jackson Hole, Wyoming.

Now a Mecca for skiers, the story goes that this remote mountain resort with rivers teaming with trout was originally selected to help lure Paul Volcker, then chairman of the Federal Reserve and a keen fisherman, to persuade a busy man it was not a waste of time.

Thirty-five years on, the fishing must still be sufficiently good to while away the days because nothing of substance emerged in terms of new policy. The emphasis was very much on stability and maintaining an economic and regulatory environment that is “steady as she goes”.

The global economy is in decent enough shape. That said, the world remains mired in debt and central bankers are still struggling to know how best to deal with it. Then, having decided on the remedy, it is a case of how best to communicate their strategies to markets such that they achieve their aims without themselves becoming the source of future instability.

As it is, the US Federal Reserve is expected to give us greater clarity this month as to how it sees the way forward to reducing the national balance sheet (that is, reducing debt) and is likely to raise interest rates again by a quarter point in December. In October, the European Central Bank will outline its plans for 2018 to taper its current monetary policy of quantitative easing (that is,  by not shovelling in as much debt) and negative interest rates.

An interesting observation of Jackson Hole 2017 is that of the four incumbent major economy central bankers present — between them the architects of monetary policy applied to 56 per cent of global GDP — at least three will be gone within two years.

Janet Yellen of the US Federal Reserve sees her term of office expire in January 2018. Realistically, her chances of reappointment are virtually zero — not least because President Trump’s stated policy of reducing banking regulation goes in the opposite direction to Mrs Yellen’s views. Indeed those she has just reaffirmed at the symposium.

Who will be her successor is a moot point. Gary Cohn —ex-Goldman Sachs and Trump’s national economic adviser —remains favourite. But he has just been vociferously critical of Trump’s response to the Charlottesville riots — something that might not necessarily endear him to the President come appointment time.

Our own Governor of the Bank of England, Mark Carney —also ex-Goldman Sachs — has already had his term extended and will head back to Canada in June 2019. Perhaps by then he might even have seen his way to increasing UK base rates back to 0.5 per cent?

Finally, Mario Draghi — ex-Goldman Sachs too; there’s a theme here — sees his fixed-term appointment at the ECB expire in October 2019 and he cannot be reappointed. Only Mr Kuroda —no, not ex-Goldman Sachs this time — at the Bank of Japan, whose term expires in April next year, is likely to be reappointed.

The received wisdom is that his not being re-appointed would be seen as a failure of Abenomics, the relatively radical economic and corporate governance reform programme introduced by Prime Minister Abe. The reforms (radical for an inherently conservative society) are slow-burn but are working, so why risk them now by changing the person who’s responsible for implementing them?  With new personalities in place, will it herald a new dawn for monetary policy, or more of the same?  We wait and see.

August has a track record for volatility in markets — think back to 2015 when China devalued its currency and markets gyrated for a month. This time there has been virtually no volatility to speak of at all, even when the North Koreans upped the stakes and sent a missile whistling over Japan. While the inhabitants of Hokkaido dived for cover, markets remained sanguine and seem inclined to remain so, presumably until Pyongyang or Washington blinks.

After a quiet month with politicians on the beach, it is back to business. Dare one hope that having recharged their batteries, they return to their various parliaments and legislatures full of vim and vigour and positive thoughts? Perhaps Donald Trump really will make progress with his economic agenda, having achieved precious little in his first eight months. And what would that mean for monetary policy?

In Europe, the clock is inexorably ticking down the seconds in the fixed two-year window in which to secure a Brexit deal (we are already five months in.) Judging by the renewed rancour between Brussels and London, for some of the combatants to have stayed on the beach might have been a more constructive option. Normal service restored.

John Chatfeild-Roberts is head of strategy for the Jupiter Independent Funds Team


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