Opinion: Jerome Powell could blow up the markets this week | Stephen Bartholomeusz
When Jerome Powell speaks at the annual Jackson Hole gathering of central bankers, economists, academics and other policy wonks in Wyoming on Friday there is a realistic prospect that he is going to blow up financial markets, or at least shake the confidence within markets that have regained their optimism in recent months.even as US bond yields have risen with investors apparently convinced that the end of the Federal Reserve Board’s current rates-hiking cycle is in sight.
Powell himself would also be conscious of his gross misreading of the US economy at the same event in the Grand Teton mountains He expected a reversion to the pre-pandemic settings of stubbornly low inflation, driven by disinflation forces that included technology, globalisation and demographics. The pandemic has affected attitudes to work, impacted migration and produced historically low unemployment rates and shortages of labour in the developed economies.
Powell will need to address the disconnect between what the markets are factoring in and what the Fed is likely to do before investors’ optimism becomes entrenched and undermines the central bank’s efforts to tighten financial conditions. Ultimately he needs to get investors focused, not on where and when interest rates will peak but how long they will remain at that level. In the developed economies, indebtedness post-pandemic is at levels that mean rates won’t necessarily have to be pushed up to historical highs to flatten activity and the inflation rate.
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