Jupiter Merlin Weekly: Central bankers go fishing
The Jupiter Merlin team take a look at the latest Jackson Hole symposium, where the world’s leading central bankers met to discuss policy.
While normally a talking shop, sometimes substantial policy changes are announced at Jackson Hole that catch markets by surprise. One such occasion was August 2020 when the Federal Reserve unexpectedly (as unexpected to its peers as the markets) announced it was moving the goal posts for the US inflation rate from 2% as a fixed monthly target and ceiling, to 2% as an average over a period of years. No longer a target; more an aspiration. Mischievously (or, with hindsight, stupidly) the Fed did not define the period. Allowing the inference of unfettered inflation (which we identified in a column at the time) this quickly became an elephant trap of the Fed’s own making: when inflationary forces were mounting two years ago but the Fed stuck rigidly to its narrative that the problem was merely transitory, there is absolutely no doubt Chairman Jerome Powell was assuming mean reversion in the inflation rate to the post-Global Financial Crisis trend of 2% or below; despite the hump, that would still allow him to be able to claim victory in achieving an average rate of 2% without having to change policy. So that went well.
Don’t call us, we’ll call you
The issue here is the risk of masking: confusing what is merely the base effect in the fall in the inflation rate (the benefit of the combination of slowing prices and the comparative time series moving inexorably forward) and what among the components of inflation might have become more insidiously embedded. His message to the markets was that while interest rates have risen from zero to 5.5% in 16 months and inflation has fallen two-thirds from its peak, do not assume that future rate rises are ruled out, and do assume that interest rates will remain at elevated levels for longer than expected before they begin to fall. For what it is worth (bearing in mind many in the markets also have been persistently wrong in their expectations both of predicting the peak rate and the timing of rates receding again), bond investors are currently ‘pricing in’ a 7% probability of a quarter-point US interest rate rise in September with a greater probability of 43% in November.
The bigger picture, fallibility and an unexpected slab of humble pie
If Powell’s speech was addressed directly at the markets, the most perceptive in the context of the strategic brief was the ECB’s Christine Lagarde’s. She acknowledged that economists’ neat, tidy models can easily become dysfunctional and misleading when confronted with exogenous shocks to the supply and demand-sides of the economy. Pat conventional economic relationships can break down. In such circumstances the by-the-book policy response may be inappropriate. She carries the scars: Lagarde was the last of her ilk defending the ditch that the real enemy was deflation; it was only in July 2022, seven months after the Bank of England had stopped quantitative easing and begun raising interest rates, and four months later than the Fed, that the ECB was forced to capitulate and reverse direction away from its negative deposit rate and join the fight against runaway inflation in the eurozone. Thus, at Jackson Hole, her thesis was that central bankers as lead policymakers need to be much more adaptable in future; they need to be braver in changing tack before the full economic picture has become clear. Intriguingly for one not in the habit of being humble and seldom short of self-assurance, she declared: “the three key elements of robust policymaking are clarity, flexibility and humility.” (her own italics in the text of her speech). Perhaps the Mark Carney shibboleth of the supremacy of the central banker has been slain and lessons really have been learned since 2021 when inflationary pressures which were evident to investors were ignored or denied by central banks with consequences that were all too evident.
Masters of the Universe? No. Just mere mortals
As the last three years have demonstrated, interest rates and QE/QT are virtually useless directly to control the supply-side of the economy. Changing the rate of interest or buying or selling a government bond does not physically unclog blocked-up supply chains; it does not prevent the Saudis and the Russians manipulating the oil supply to suit their own ends; nor does it magically produce lorry drivers from thin air as was the need in the UK in the autumn of 2021. Bank of England Governor Andrew Bailey (absent from Jackson Hole, he sent his deputy Charlie Bean instead but this week at the Treasury Select Committee Bailey insisted that inflation “will fall fast before the year-end” and that UK interest rates are “near their peak”) when looking at wage inflation regularly rails about shortages of labour supply with so many of working age being declared unfit for work; he knows that is entirely the responsibility of government, nothing he as Governor can do will alter the situation even though wage inflation is making his job doubly difficult to manage national prices.
On the other side of the equation, as alluded to in Powell’s speech, he and his fellow policymakers are also crossing their fingers that those available levers remain effective controls for the demand-side of the economy, curbing consumers’ behaviour in the endeavour to manage inflation. As we have noted before, interest rates and bond purchasing/disposal programmes are not precision instruments; they are blunt tools with inherent lags between implementation and a measurable effect. Time will tell soon enough whether what has been done to date is too much, too little, or about right.
Left hand, right hand and vice versa
We have observed on several occasions in these weekly musings that there is little in today’s economic conditions or policymakers’ responses to them that will be found in any conventional textbook of economic theory. This period will provide a curious case study for future students of economics and politics, prompting the question: “did that really happen? Why? How?”
No wonder asset prices are susceptible to periodic bouts of significant volatility! It pays for investors to keep an open and enquiring mind; nobody has all the answers. On the Jupiter Merlin team we have a guiding principle: when the facts change, we reserve the right to change our minds. A useful dictum!
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
NHS reform: time to get a grip
We have observed on several occasions in these weekly musings that there is little in today’s economic conditions or policymakers’ responses to them that will be found in any conventional textbook of economic theory. This period will provide a curious case study for future students of economics and politics, prompting the question: “did that really happen? Why? How?”
No wonder asset prices are susceptible to periodic bouts of significant volatility! It pays for investors to keep an open and enquiring mind; nobody has all the answers. On the Jupiter Merlin team we have a guiding principle: when the facts change, we reserve the right to change our minds. A useful dictum!
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
Authors
![](https://www.jupiteram.com/uploads/2021/01/2312f526c8a3d1a1c3195604038fdabc/alastair_irvine_350x350.jpg?v=1640778798)
![George Fox](https://www.jupiteram.com/uploads/2021/01/60e7b31ad73afe2c39b2c6c8b0d8789c/george_fox_350x350.jpg?v=1640780876)
![John Chatfeild-Roberts Jupiter Co-head of Strategy Independent Funds](https://www.jupiteram.com/uploads/2021/01/e7456f93b5fbf12d1a95149a88299506/john_chatfeildroberts_350x350.jpg)
![](https://www.jupiteram.com/uploads/2020/06/5191bcc16c9c2e69073325e052846ff5/algy_smith-maxwell_350x350.jpg?v=1640779093)
![Amanda Sillars](https://www.jupiteram.com/uploads/2021/01/96f01f655a8de35f0c3eb2102c6a3cfd/amanda_sillars_350x350.jpg?r=684f93e5977a727670c1fa21d640fea0&v=1640779274)
![David Lewis](https://www.jupiteram.com/uploads/2021/01/d15bf39db17ee660c5f0266ec2fc3f1a/david_lewis_350x350.jpg?v=1640780302)
![Venetia Campbell](https://www.jupiteram.com/uploads/2023/05/cf08d06b5dae5b95d1ca9cc48e647a07/venetia-campbell_rgb_350x350px.jpg?r=200012e584620e492d211cdc7a698f1a&v=1707125295)
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