August 25, 2017

Breakingviews: Central Bank Confab May Be-calm Before the Storm

by Breakingviews.

The annual central bank confab in the Grand Tetons may be the calm before the storm. With the U.S. and global economies in good shape, Federal Reserve Chair Janet Yellen can enjoy what may be her last show in Jackson Hole, Wyoming. But fiscal fights in Congress, Fed bond sales and doubts about her future loom. The European Central Bank nears its own taper even as low inflation continues to confound economists.

This year’s conference, with the theme “Fostering a Dynamic Global Economy,” is expected to be a ho-hum affair. Yellen plans to talk on Friday about financial stability but is not expected to make new policy announcements. The U.S. unemployment rate stands at a 16-year low at 4.3 percent and the Fed has hiked interest rates twice this year without rattling markets.

But fiscal challenges lie ahead. Fitch Ratings said Wednesday it could review the U.S. credit rating if Congress doesn’t raise the $20 trillion debt ceiling by a Sept. 29 deadline, after which the federal government risks default. Lawmakers are also trying to reach a budget deal to avoid a government shutdown around then, despite Trump’s threats. Those prospects could affect the Fed’s plan to shrink its $4.5 trillion balance sheet, which Yellen is expected to unveil after next month’s Federal Open Market Committee meeting.

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At the same time, it’s unclear how much longer Yellen will stick around. Her term as chair expires next February. Trump said his chief economic adviser Gary Cohn, former president of Goldman Sachs, is a candidate to replace her. Yellen could also be reappointed. Typically a candidate is announced by early autumn.

Markets will also be waiting to see if ECB chief Mario Draghi gives any more indications of when the bank will start its own taper. The recent strengthening of the euro has injected more uncertainty into the timing of the move. Draghi will be making his first Jackson Hole appearance since he laid the groundwork for the bank’s quantitative easing in 2014.

There are also increasing calls for the Bank of Japan to prepare to trim its securities holdings given the country’s improving economy. But all three regions are also grappling with persistent, lower-than-expected inflation, without any helpful solutions. Participants should enjoy the outdoors in Wyoming as gray clouds are moving in.

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