Friday’s speeches from Fed Chair Janet Yellen and ECB President Mario Draghi at the Jackson Hole Economic Policy Symposium are more notable for what they didn’t say than what they did say.
The Fed Chair didn’t really mention monetary policy at all, which was not especially surprising in the context. The Fed Chair’s remarks were a defense of banking system policies over the recent past and perhaps had a suggestion that someone who does not expect to stay in office beyond the start of next year.
That suggestion, if anything, reinforces the idea of a quantitative monetary policy tightening scheme being implemented as an insurance policy against an “unqualified” person taking control of the Fed. If quantitative policy is put onto autopilot, then even if Ivanka Trump becomes Fed Chair there is a degree of protection.
Nevertheless, for investors it might also be good to take notice that Cleveland Fed President Loretta Mester, on Saturday on the sidelines of the Fed’s annual retreat in Jackson Hole, urged her colleagues to look past recent weak inflation data and to stick to their gradual pace of lifting interest rates, with one more increase projected before the end of this year. She also said: “We have to move policy a little bit before we get to the goals or else we’re going to get behind.”
Meanwhile, Draghi’s remarks did not mention the euro, which was taken as a support for a stronger euro.
Again, in the setting, comments on the euro would have been surprising. Therefore, the reaction on the euro may be a little overdone.
The dollar will not however be helped by the hurricane disaster in Texas over the weekend with extensive flooding in Houston causing considerable human misery.
Economically, this is disruptive, though how disruptive will depend on the extent to which poor weather continues and the speed of the response in the area.
Politics is unlikely to help the position of the dollar with President Trump’s spate of measures on Friday drawing criticism.
There was an outright refutation of Trump’s first presidential pardon of Joe Arpaio, the former Arizona sheriff, by the Republican Speaker of the House Paul D. Ryan, who called the president’s action a misuse of pardon power and that sent a dangerous signal (Ref. ).
The Secretary of State was also implicitly critical of the President when on Sunday, Fox News Sunday moderator Chris Wallace asked Tillerson about Trump's response to the racist carnage in Charlottesville, Tillerson replied: “I don't believe anyone doubts the American people’s values or the commitment of the American government, or the government’s agencies to advancing those values and defending those values.” And then Wallace asked the obvious follow-up question: “And the president’s values?” “The president speaks for himself,” was Tillerson’s answer.
This matters to investors because, and despite the head of the White House national economic council Gary Cohn has been promising a big push for tax reform, the absence of political capital from the White House will remove the initiative from the executive branch.
Investors are increasingly likely to look to Congress for leadership.
The Trump twitter feed also criticized NAFTA again and insisted that Mexico would be paying for the big “Wall.” We read: “We are in the NAFTA (worst trade deal ever made) renegotiation process with Mexico & Canada. Both being very difficult, may have to terminate?
All this is not to say that Europe does not have its own politics to contend with.
On Friday, the Hungarians, which are members of the European Union (EU) withdrew their ambassador from the Netherlands, which is of course also a member of the EU, and suspended high-level diplomatic ties in response to critical remarks by the Dutch ambassador Gajus Scheltema who had been critical of Hungary's unwillingness to participate in a European Union plan to relocate asylum-seekers from Greece and Italy while he also criticized the Hungarian government's campaign against billionaire financier and philanthropist George Soros and drew parallels between the government's efforts to "create enemies" with those of the Islamic State.
This is unusual, to say the least.
Elsewhere, French President Macron’s approval ratings hit new lows, which may lead to some investors to questioning Macron’s reform momentum.
These changes do not matter to investors in the short term, of course, but they may have a bearing on the medium-term economic outlook, although this sort of political noise in Europe is now rather drowned out by the “cacophony” of political noise that comes out from the United States.
Etienne "Hans" Parisis is a Belgian-born bank economist who has advised global billionaires and governments on the financial markets and international investments. Parisis is based in Panama City, Panama.
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