To The Moon

Jackson Hole is an American winter resort in the state of Wyoming. In summer, it is usually very quiet in such ski resorts, but for visitors to Yellowstone National Park, it is on the route. Moreover, the valley near Jackson Hole offers good views of the Grand Tetons. On that plain lies the most photographed barn in the United States with the peaks of the Tetons in the background. The photo shows an idyllic Bob Ross picture, disturbed in summer only by the many photographers all trying their best to emulate the National Geographic photo. Since the advent of Instagram and Facebook, places like this are very popular. Jackson Hole is otherwise best known for the meeting of central bankers.

Central bankers' meeting

Jackson Hole is thus best known for the annual meeting of central bankers in the last week of August (this year from 24 to 26 August). That has been organised there by the Federal Reserve of Kansas City since 1978. The actual venue is not in the town of Jackson Hole but at the nearby Jackson Lake Lodge in Grand Teton National Park. The venue was chosen in the past in part because it was known that Fed chairman Paul Volcker was an avid angler and this was used to entice him to attend the meeting.

The title of this year's symposium is 'Structural Shifts in the Global Economy'. In recent years, the importance of the meeting has grown, especially since major changes in the course of monetary policy are regularly communicated there for the first time. This Friday, Jerome Powell will speak, but no changes are expected. Powell will reiterate that the Federal Reserve will remain data-dependent, at least that is what the market assumes

Interest rates through 4 per cent for the third time

Yet again, the timing of the meeting is spot on. After all, for the third time in a year, US interest rates are again quoting above 4 per cent. The first time was October last year and that moment coincided with the bottom in the stock market. The second time interest rates were above 4 per cent was early this year and a week later there was a sudden banking crisis. So this is the third time and interest rates are also immediately at the highest level since 2008.

The remarkable thing is that the rise in interest rates is due to good news, namely the embrace of the soft landing scenario. With that, nobody seems to be reckoning with a recession anymore. For the record, at the end of last year, 85 per cent of economists were counting on a recession in 2023. Now that it is almost certain that a recession will not happen, interest rates can go up.

The next move in interest rates is down

Yet the next big move in interest rates is likely to be down. As so often, central bank overkill is looming. The money supply is shrinking, the yield curve is inverted and commercial banks are rapidly becoming less willing to extend credit, partly because of tougher capital requirements in the US from 1 January. That combination in itself almost guarantees a recession by 2024.

The current soft landing is largely caused by a generous fiscal policy with robust investment programmes ironically named the Inflation Reduction Act. Moreover, budget deficits are in danger of widening further due to rising interest rates. In a short time, the amount the United States has to pay in interest has doubled to almost $1 trillion. By comparison, US tax revenues are about $5 trillion a year. The moment interest rates rise further, soon a third of the US budget goes to interest expenses, and in a country where it is politically impossible to raise taxes, that is a problem.