Jackson Hole Tests the Fed’s Framework

Investors are keeping a close eye on Jackson Hole for signals on the economic outlook and the path for rates. Our Chief U.S. economist Michael Gapen joins Global Head of Macro Strategy Matthew Hornbach to discuss whether markets get what they want—or what the Fed needs.

Read more insights from Morgan Stanley.

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Matt Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy at Morgan Stanley. 

Michael Gapen: And I'm Michael Gapen, Chief U.S. Economist. 

Matt Hornbach: Today, we'll be discussing the Jackson Hole Economic Symposium and Chairman Warsh's opening remarks. 

It's Thursday, August 27th at 10am in New York. 

So, Mike, let's get right into it and talk about the upcoming opening remarks by Chairman Warsh at the Jackson Hole Economic Symposium that will be delivered to the public at 10 am tomorrow, Friday. How are you thinking about what to expect from those opening remarks? 

Michael Gapen: Well, historically, and by historically, I mean in a post-2008-2009 world, Jackson Hole has been used, not every year, but frequently as a venue to communicate to markets. The longest gap on the Fed's meeting calendar is between the July and September meetings. So, Jackson Hole falls between that and provides a useful opportunity to communicate what might be coming. 

That's what's normally been done. Warsh has repeatedly stated he wants the Fed to talk less and communicate less and say less. So, I don't think we will see or hear, in this case, a lot about his views about how the economy is operating today and how monetary policy may be conducted into year-end. So, I don't think we'll hear a lot about, say, the December; the outlook for the economy from September to December, and what it might imply for interest rate policy or balance sheet policy. 

So, little in the way of near-term forward guidance. 

I do think, however, he did say in the July press conference that the venue would be good to tackle some of these big questions that he has talked about, that he's created these task forces for. So, whether it is the balance sheet or the inflation framework, or communication or AI and productivity or data quality and so forth. This would provide, I think, a reasonable opportunity for him to start talking about that. 

I don't think maybe we'll get a lot of conclusions. But I would look for commentary that's more in the question; or in the spirit of those big questions and less about the near-term conduct of policy.

So maybe not what markets want, but this is what markets will get. 

Matt Hornbach: Just rewinding a bit, the conference itself is on a somewhat of a niche topic. What exactly is the conference about? And, in terms of the papers that get released at the conference, do you have any sense as to where they might be headed? 

Michael Gapen: So, the topic of this conference, the economic symposium, as you noted, is Financial Innovation: [its] Implications for [the] Payments [system] and [monetary] Policy. 

So, I would expect there to be a lot of sessions for things like central bank digital currencies or stable coins or Bitcoins. Near money type innovation that has happened in recent years, which leads to things like competition for deposits from the non-financial sector vis-a-vis the financial sector. 

So, a competition of near moneyness to money, if you will. Its implications for the interaction between the non-financial system and the financial system, competition for deposits. Does it create risks around financial disintermediation? And therefore, how might the regulatory environment and monetary policy work in that world? 

So little more, I'll call it, esoteric and maybe arm's length from the day-to-day conduct of policy. But I would look at the speeches probably in that vein. Deposit competition, financial market stability, and what kind of regulatory framework might you need to ensure we can still conduct policy effectively in that world. 

Matt Hornbach: Sounds like an exciting set of papers… 

Michael Gapen: Yes. Yes. 

Matt Hornbach: … for professors to read through. 

Michael Gapen: This is why they don't often leak the schedule too far in advance, right? We all might decide not to listen. 

Matt Hornbach: Indeed. Well, it is the end of August, and people are probably still on holiday here and there… 

Michael Gapen: I'm doing my best, but you called me in today. 

Matt Hornbach: Yeah, the least I could do. So, you did mention that this might be an opportunity for Chairman Warsh to maybe spotlight a bit these task forces and the topics that they're tackling, one of which is the inflation framework. 

And that word framework, I think, is important because the investors that we've been speaking with are frustrated that the Fed has not really laid out a framework – for monetary policymaking in this new era of Chairman Warsh, and his leadership at the Fed. 

So, I'm curious, if we're not going to get forward guidance on monetary policy and what will happen at the next meeting. And we're also not going to get much forward guidance on the framework that the Fed is using to decide on what to do with short-term interest rates. What are we meant to think about the framework? 

Michael Gapen: Yeah, I think ultimately, of course, we're going to need to know this, and this is w