August 22, 2024 - 10:00am
The US Federal Reserve Board gathers today in Jackson Hole, Wyoming for its annual retreat. People in high finance will say that Jackson Hole is the Woodstock of central bankers, though that may say more about central bankers than about the event. Nonetheless, the proceedings are scrutinised carefully by economists, bankers and fund managers around the world, probing for clues as to the direction of the world’s biggest economy.
Running since 1981, the event brings together the governors of the American central bank, along with leading academics, government officials, corporate leaders and foreign guests for three days of brainstorming on the global economy, the state of markets and the future direction of policy. It seems fitting that this year’s event should start just as the Democratic Convention is ending in Chicago, because it takes place at an extraordinarily precarious moment in the country’s political history.
The economic context is delicate enough on its own. The economy seems to be teetering on the brink of a recession and markets have been screaming for interest rate cuts to stave one off. However, inflation hasn’t yet reached the point at which the Fed can conclude that it has decisively won the battle to bring it back to earth. As a result, it’s not yet clear if the Fed has waited too long to cut rates, or risks doing so too early if it moves soon.
But it’s the political backdrop that makes this year’s retreat so fraught. Both sides of the American political divide are calling this year’s presidential election the most consequential in the country’s history. Democrats say freedom is on the ballot and Republicans say that if they lose, Americans won’t have a country anymore. The stakes could barely be higher, which means the vote will be hotly contested and possibly disputed.
Amid all this, the Fed has to decide when to begin its rate-cutting cycle, and how far to take it. Investors widely expect it to make a first move next month, starting with a 0.25% cut to its target Federal Funds rate, which currently sits in the 5.25-5.5% range. It may not seem like a lot, but it would signal to markets the future direction of travel. And while the governors will be guided by the data on inflation and the economy in making their decision, no matter how justifiable their decision may be, it will immediately get spun politically.
Depending on what the Fed decides to do next month, the stock market could rally, or it could sink. The dollar, already weakening, could plunge. Interest rates might shoot up. In light of all this, there’s a good chance the governors may use their speeches to break it to the markets gently, indicating a steady-as-she-goes approach to cutting gradually in the context of growing confidence that the economy is bearing up well. If at the end of it what they get is a soft landing — slower if steady inflation, slower but steady growth, gradual easing of interest rates and neither a crash nor boom in the stock market — if in short they can arrange an economy so unexceptional they stay out of the headlines until after the election, they’ll no doubt feel relieved.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).
jarapley
Join the discussion
Join like minded readers that support our journalism by becoming a paid subscriber
To join the discussion in the comments, become a paid subscriber.
Join like minded readers that support our journalism, read unlimited articles and enjoy other subscriber-only benefits.
SubscribeA lot of waffle about monetary policy which completely ignores the underlying reasons for Britain’s current malaise: a) over-regulation and over-taxation of the small businesses which employ the vast majority of working Brits, b) the pursuit of ludicrous fantasyland energy policies and c) the constant artificial inflation of house prices which, coupled with massive public sector waste, have created an almost universally parasitic middle class.
The issue is less the Chancellor – Reeves is clearly out of her depth – but the Treasury, which will define policy for taxation, public expenditure and investment, irrespective of which party is in government, and which individual holds the role of Chancellor – and who probably needs to endure powerpoint after interminable Treasury powerpoint from one dry day to another. Most of the Treasury staff are well-meaning of course, but that is part of the problem – the UK is unlikely ever to implement the radical reforms that will bring meaningful change, nor take advantage of the opportunities offered by Brexit.
Most of the Treasury staff are well-meaning of course,
But have any of them ever been anywhere near the coalface? My own experience, gained in dealings with pretty well every branch of the public sector, is that these guys have no real clue how anything actually works.
Let’s have a one off wealth tax. Calculate the percent needed to put things in order. There’s no avoiding a one off tax.
Hold on a second there.
Osborne austerity? Spending grew in real terms in every single one of Osborne’s years! That was NOT austerity.
The austerity that is truly needed is benefits austerity and that is now baked in, whatever you say. The simple and rather bitter situation is that the Welfare State has run out of welfare. You can’t just wish it out of thin air.
There’s nothing our Rach can now do. She’s blown her chances. There’s no way back.
This all goes to show that our political class could not negotiate their way out of a body bag. And they are in charge folks!
She’s a woman and therefore difficult, but not impossible, to get rid of on grounds of gross incompetence. I’m just grateful that she’s white and heterosexual otherwise the economic outlook would be very grim indeed.
Oh come off it Yanis, Osbornes Austerity was a walk in the park. But I do remember your Oxford University lecture when you talked of You and your Prime Minister being summoned to the ECB for you and Country to be be castrated. It really gets my goat when the Left here complain ad infinitum about Austerity. What the Greeks suffered was Austerity regardless of whether of it was their own fault.
Full disclosure: I am biased for Yanis. He is one of my fav in terms of world financial economy!
Not withstanding my bias; however, Britain’s current approach—shuffling money between the Treasury, the Bank of England, and financial institutions—has no long-term future. The illusion that financial markets alone can sustain economic growth is collapsing, and the cracks are showing. As interest rates rise and bond markets tighten, Britain faces a moment of reckoning: either it rebuilds its productive economy, or it resigns itself to perpetual stagnation and decline.
The real debate should not be about austerity vs. spending or Osborne vs. Reeves. It should be about why Britain remains dependent on financial gimmicks rather than real economic strength. Until that conversation happens, all Chancellors—Reeves included—are simply rearranging deck chairs on a sinking ship.
Oh dear! What a mess.
The one very sensible suggestion from this article is about us not overpaying interest to the BoE. Richard Tice has been banging on about this for almost a year. Vote Reform!
“… the mindless fire sale of government bonds”. Announced by the Bank the day before Truss’s mini-Budget. A complete coincidence, of course.
Oh, and by the way, Osborne talked a lot about austerity to reassure the markets but Government spending actually went up in real terms every year. That’s not my definition of austerity.
I see the reply feature is disabled – one comment below references the davos men and their “reset”. Well i am sure they’ll try – but don’t hold your breath. As i have said often 25% of the worlds estimated $400 trillion assets are held in stock markets or other financial vehicles – the rest are other assets, often physical. Exactly how is davos man going to get his paws on these assets. I am sure he could rob Stavros the kebab van man but i doubt Putin, MBS or the leaders of the Sinoloa Cartel are losing sleep over his threats. An example showing the impotence of ideology follows: A young motorcycle enthusiast called Yanis wanted his notoriously extractive and criminalised society to be more equal. He though if he could destroy the economy men of fighting age would revolt and create the justice for all Utopia he set his sights on. Then he was stopped, by the Germans with a little help from an Italian – though the latter didn’t stay the course. 1940s all over again eh?
Well , I have a degree in economics and am a qualified accountant. And I didnt understand that.
Now I know I am thick and slow – but could the author please explain that more clearly.
I have no doubt he is right, any chancellor with an untruthful CV is clearly stupid because they are bound to be found out . So I dont need convincing on that score. It’s the financial mechanics I didnt follow.
And yet Osborne talked ‘up’ austerity to stabilise the financial markets, but actually cut little.
Well Reeves is clearly in trouble when Left Wing leading minds ( sic) begin to openly criticise her works and denigrate her intelligence. Mind you, if she did follow any of this guys pearls of wisdom, she would be even deeper in the doo doo. And she’s already up to her neck n it.
What I don’t understand about the anti-‘austerity’ crew is what the alternative would be. Given the primacy of the bond market (which Reeves is experiencing today), if Osbourne had not cut spending, when Covid came along we would have had far less ability to respond in a super-Keynesian deficit-financed way. At some stage the kindness of strangers wears thin and so even socialists like Reeves will end up (soon, I expect) making cuts, i.e. implementing austerity. As ever with Mr Varoufakis there is some very interesting stuff here – the idea of the Bank of England paying the bankers the going interest rate only for part of their deposits, the rest at zero being one. Was that not in the Reform UK election manifesto? Maybe I dreamed that.
Reeves, Hunt, Hammond, Osbourne.
Reeves is clearly the most dim, but the problem is that they have all towed the Treasury line. They tax big. Spend big. Regulate heavily. They do what Gordon Brown, who heavily politicised the Treasury, put them there to do
“[t]he process by which money is created is so simple that the mind is repelled”
Indeed, but one has to do some work to add value to a product and so create wealth. But these days, in the UK, it is financially viable to do no work at all. And should anybody be so minded as to call themselves an entrepreneur and actually try to do some work, they are ‘repelled’ by over-burdensome regulation and by the prevailing attitude that any return for that work should be redistributed for the ‘social good’.
It’s simpler than that. All they can do in office, happy that the main decisions are made elsewhere, is give away money and persecute indigenous British. They have a particular loathing for the private sector. The favoured areas for Labour vote are public sector, welfare and the religious conservatives. Everything is targeted to growing nothing other than that vote, apart from the pensioners (see above) and retaining power.
For the rest of us it’s a wearing down process. ‘Tis the Fabian way.
Austerity? You’re having a laugh aren’t you? Have you seen the levels of taxation, borrowing and spending we are subjected to? These Marxists are a massive joke.
The usual Varoufakis nonsense kicking off from assumptions that are never justified. In this case the claim that Britain’s “business model” is in some unspecified way “broken”. Not forgetting the obligatory “false memory” (I’ll be generous here) of Thatcher “vandalising heavy industry”.
How about this Yanis: perhaps the UK “business model” isn’t that bad at all, but being implemented poorly, not least by interfering and incompetent governments (not limited to the present one) ?
I suggest also that the UK’s resources – both financial and otherwise – are not at all as “scarce” as he wishes to make out. Just being poorly used and wrongly allocated.
There’s a reason this guy is an ex-finance minister.
The last time Labour hiked a tax, income tax from 40% to 50% it generated little if no extra revenue, and arguably saw a decline in tax revenues. With the apparently unforseen (by Reeves and the Treasury) consequences of this one – all the private companies, GPs, charities etc servicing the public sector either passing on the cost rise or cutting back on staff, plus the fallout in hospitality, retail etc I would not be surprised to find the measure raising only a fraction of the Government’s forecast.
At one time I would have found it surprisng that Labour would put low paid staff in the firing line of their policies, but this seems to fit the pattern, as seen with the winter fuel allowance, of hit the vulnerable first and avoid impacts on affluent Guardian readers.
Instead of reducing the NI threshold, so nearly doubling the NI cost of someone on the minimum wage, they could have put an increased rate of say 25% on wages of over £100,000. However this would disproportionately impact the likes of Goldman Sachs, Deloittes, Google, Microsoft and others who advise the Government so I can see why such a measure was not taken.
Well Yanis
The bankers appear to have sorted out your basket case of a country no thanks to you.
Also there was no austerity under Osbourne he just reigned in the profligacy a bit.
Don’t suppose it ever crossed your mind that you might actually be wrong.
“Having warmed up, she followed with the termination of winter-fuel payments for pensioners”
The Treasury had been urging successive Chancellors to do that for ages. Indeed, it would appear that Rachel Reeves is perfectly aware of her own inadequacies and has followed advice from Treasure Mandarins, the Bank of England and other advisors to the letter. That is why there is so little kickback compared to when Liz Truss tried to cut across Treasury doctrine.
What this worryingly shows is not that we have a sub-par Chancellor, but that those advisors and officials who are supposed to know what they are doing – do not!
Beware of Greeks and all that, but be especially so if they come with a big baggage of closed society negative ideologies Does this guy not realise that winter is only halfway done in UK – unless ofc he has some super pre-cognition power that has been hithertoo absent? Reeves is a clown – just the sort of person who could end up running the financial ministry of a failed state – eg Greece, Italy, and likely UK in short order. I think the gilt traders are playing her but also now its come out she faked her experience/credentials i expect there’s well founded fear of what she may do. The financial systems and the govts of the world are a kind of team.There’s a quite rational effect when a cheater or chancer is found in a team, people tend to turn on them, often insadness but more likely in anger – no-one likes to be conned and that in effect is what starmer has done appointing reeves and she in turn carried on the deceit when she accepted the job.
What I can’t understand is why she – and her successor – could understand anything about life in Britain. They have no experience of anything, just theories.
Wherever one looks we cannot escape the Davos man on his way to 2030 and the Great Reset. Reeves merely a pawn on their chess board.