Episode summary
Jackson Hole Tests the Fed’s Framework
Thoughts on the Market (Morgan Stanley)
· · 12 min · Hosts: Michael Gapen, Matthew Hornbach
Summary
Jackson Hole is expected to be more about broad policy questions than near-term rate guidance. The host and the guest argued that Chairman Worsh is unlikely to give markets much on the September-through-December outlook, because he has repeatedly signaled a preference for saying less. Instead, the guest expects remarks that touch on bigger themes the Fed has created task forces around, including the balance sheet, the inflation framework, communication, AI and productivity, and data quality.
The symposium’s formal theme is financial innovation and its implications for the payment system and monetary policy. The guest expects discussion of central bank digital currencies, stablecoins, bitcoin, deposit competition, and the risk of financial disintermediation, with an eye toward how regulation and policy can still work in that environment. For investors, that means the speeches may be intellectually interesting but less useful as near-term trading guidance.
The discussion then focused on what the Fed’s framework actually is under Worsh. The guest said markets want clarity on the reaction function: whether higher inflation should be met mainly with higher short-term rates or with balance-sheet tools. He argued the Fed cannot be a silent referee, because monetary policy works through financial markets and the market needs to know the rules of the game. The host noted that investors were frustrated by the lack of signal around the July meeting, even though the market had only assigned about a one-in-three chance of a hike.
Key takeaways
- The guest expects Worsh to avoid giving much near-term forward guidance at Jackson Hole and instead discuss larger policy questions.
- The conference theme is financial innovation, with likely focus on CBDCs, stablecoins, bitcoin, deposit competition, and financial disintermediation.
- The guest argues investors still need the Fed’s reaction function: whether inflation will be met with rate hikes, balance-sheet tools, or both.
- The host noted markets were disappointed by the Fed’s lack of signaling before July, even though pricing implied only about a one in three chance of a hike.
- The guest said the rest of the 18-member FOMC likely still has a largely conventional policy view, which matters for how the market interprets any ambiguity from the chair.
Notable quotes
“I don't think we will see or hear in this case a lot about his views about how the economy is operating today”
“So little in the way of near-term forward guidance. I do think however he did say in the July press conference that the venue would be good to tackle some of these big questions”
“the topic of this conference the economic symposium as you noted is financial innovation its implications for the payment system and monetary policy”
“I think the market is is wondering what Fed chair we have and what his reaction function is”
“I don't think that there's a world where you get the unvarnished market expectation independent of the Fed”
How the episode opens
Welcome to Thoughts on the Market. I'm Matthew Hornbach, global head of macro strategy at Morgan Stanley. — And I'm Michael Gapen, chief US economist. — Today we'll be discussing the Jackson Hole Economic Symposium and Chairman Wars's opening remarks. It's Thursday, August 27th at 10:00 a.m. in New York. So, Mike, let's get right into it and talk about the upcoming opening remarks by Chairman Worsh at the Jackson Hole Economic Symposium. that will be delivered to the public at 10:00 a.m. tomorrow, Friday. How are you thinking about what to expect from those opening remarks?
Well, historically, and historically, I mean, in a post208, 2009 world, Jackson Hole has been used, not every year, but frequently as a venue to communicate to to markets. The longest gap on the Fed's meeting calendar is between the July and September meetings. So Jackson Hole falls between that and provides a useful opportunity to communicate what might be coming.
That's what's normally been done. Wars has repeatedly stated he wants the Fed to talk less and communicate less and say less. So I don't think we will see or hear in this case a lot about his views about how the economy is operating today and how monetary policy may be conducted into year end.
So I don't think we'll hear a lot about say the December the outlook for the economy from September to December and what it might imply for interest rate policy or balance sheet policy. So little in the way of near-term forward guidance. I do think however he did say in the July press conference that the venue would be good to tackle some of these big questions that he has talked about that he's created these task forces for.
So whether it is the balance sheet or the inflation framework or communication or AI and productivity or data quality and so forth this would provide I think a reasonable opportunity for him to start talking about that.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- jackson hole
- fed framework
- rate path
- economic outlook
- market expectations
Companies and tickers mentioned
- MS
- Morgan Stanley
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Watch “Jackson Hole Tests the Fed’s Framework” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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