The Jackson Hole summit has traditionally been seen as a way to pick up the central threads of economic debate and search for clues over the future direction of policy. That it is now seen as potentially crucial for maintaining confidence in equity markets demonstrates just how far the credit crisis has shaken faith in the concept of the rational free market.
If there were any expectations for Ben Bernanke, the chairman of the Federal Reserve, to once again ride in on his white horse laden with dollar bills, they were roundly frustrated by his speech.
The speech focused on the role of fiscal policy in the next stage of US recovery. On the subject of extraordinary monetary policy, he simply said “the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus”.
The message is clear enough. Central banks remain ready to intervene in markets if deemed necessary but they are no longer willing to take a proactive stance to boost equity valuations to improve the broader economic outlook.
Chelsea Financial Services managing director and Adviser Fund Index panellist Darius McDermott says: “Another round of QE could have set risk assets on an upwards trend but it is not what it is primarily supposed to do. There are so many macroeconomic banana skins out there at the moment that it seems wise to be cautious.”
Interestingly, markets seemed to respond positively to the summit and climbed from their lows following sharp falls in early August.
What is far less certain is whether politicians will be able to overcome partisan differences and populist measures in order to put a fiscal framework in place to support a fragile economic recovery. Central bankers and economists are increasingly calling for short-term fiscal stimulus measures coupled with a longer-term plan to reduce budget deficits and public debt.
The debacle over raising the debt ceiling demonstrated that both Democrats and Republicans are willing to play a game of chicken with debt markets for political gain. As a result, the compromise reached fell far short of even the most modest expectation of a medium-term fiscal plan.
Bernanke was unequivocal. He said: “Finally, and perhaps most challenging, the country would be well served by a better process for making fiscal decisions. The negotiations that took place over the summer disrupted financial markets and probably the economy as well. Similar events in the future could, over time, seriously jeopardise the willingness of investors around the world to hold US financial assets or make direct investments in job-creating US businesses.”
How long equity markets will be able to shrug off these macro concerns depends in no small part on signs that these problems are being brought under control. While the financial crisis may have wrenched control of the economy away from the banking sector, it seems politicians are unsure what to do with their newfound power.