The hole in Jackson Hole

Read the speech delivered by Jerome Powell, the Fed chairman at the Kansas City Symposium – an annual jamboree of central bankers in Jackson Hole, Wyoming. He has said all the right things only to either discount them later or to ignore them.

For example, he recalls the Brainard principle:

Brainard principle, which recommends that when you are uncertain about the effects of your actions, you should move conservatively. In other words, when unsure of the potency of a medicine, start with a somewhat smaller dose.

This is perfectly valid in the case of QE. But, precisely that is what he goes on to defend, in the next sentences.

He correctly notes:

in the run-up to the past two recessions, destabilizing excesses appeared mainly in financial markets rather than in inflation. Thus, risk management suggests looking beyond inflation for signs of excesses.

But, he reserves the brave words ‘whatever it takes’ only to fight unanchored inflation expectations and financial crises of the type we encountered in 2008. If financial excesses precipitated the last two recessions, one would expect the Fed leadership to pledge to do whatever it takes to avoid building up financial excesses. But, he did not say that.

In the meantime, signs of financial excess abound. We documented one yesterday.  Here is another:

Before the financial crisis, about a quarter of the leveraged loan market was termed “covenant-lite”; today it stands at almost 80 per cent, according to Moody’s. Almost two-thirds of the entire market now has a lowly credit rating of B2 or worse, up from 47 per cent in 2006. In other words, an already junky market has deteriorated further…..

More than half of loan issuers have zero “unsecured” debt that could insulate lenders from the pain of a debt default, AllianceBernstein pointed out in a report this week. [Link]

Alliance Bernstein pointed out,

investment-grade credit quality got worse. Today, 48% of the bonds in the index are rated BBB, the lowest rung on the investment-grade ladder, up from 33% at the end of 2008. A-rated bonds declined from 50% to 41% over that time. [Link]

Channelling Greenspan for risk management makes one wonder if the Federal Reserve has learnt anything from the mistakes it made in the last twenty years because ‘the once in a lifetime improvement in productivity’ that Greenspan swore by, proved to be a chimera.

But, there are cheerleaders for a policy approach that avoids dealing with financial excesses. See this, for example.

John Authers of FT thinks that the overall message of Mr. Powell’s testimony at Jackson Hole was dovish in tone. May be, he is right.

The more things change, the more they remain the same.

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