Mike O’Sullivan is Moonfare’s Chief Economist and Senior Advisor. You can meet Mike at many of our community events and investor calls or follow his monthly commentary published on Moonfare's blog.

The really important event of the last week was not the Democratic Party convention in Chicago that crowned Kamala Harris as the party’s candidate for president, but rather a dull offsite gathering for professional economists in remotest America.

The event, known as the Kansas Federal Reserve Symposium at Jackson Hole, Wyoming, or colloquially as ‘Jackson Hole’ is where leading central bankers and academic economists go to take the temperature of the macro world, and offer guidance as to what their next move might be.¹

‘Jackson Hole’  has become one of the more important platforms for central bankers, due in little part to its proximity to decent fishing. Legend has it that up to the early 1980’s the Kansas Fed struggled to attract participants to its annual conference but came up with the idea of hosting it in Jackson Hole, because the prospect of excellent trout fishing might lure then Fed Chairman Paul Volcker (a keen fisherman) to the conference.²

The strategy worked and Jackson Hole gathering is now internationally famous and attracts many professional central bankers, whose pronouncements are closely followed by markets. Never before has trout played such an important role in central banking.

The title of this year’s symposium is Reassessing the Effectiveness and Transmission of Monetary Policy, where the debate will, in its own very arcane way, focus on the plumbing of the financial system, and particularly on how ‘liquidity’ directed by central banks flows through the economy and impacts factors like industrial output, inflation and consumer behaviour. I will spare readers the detail on some of the research papers but wanted to make a few of my own observations.

A crisis of expectations

The first relates to market expectations of monetary policy (interest rates). Two recent, related observations are worth mentioning. As a result of the August equity market sell-off, there were prominent calls for an emergency interest rate cut from the Federal Reserve, and relatedly that the Fed should make a 50 basis point cut in rates at its forthcoming September meeting (from prominent commentators such as Prof Jeremy Siegel of the Wharton Business School).³

The Fed has only ever taken such dramatic action in the thick of deep crises (LTCM/Russian economic collapse, the dot.com collapse, 9/11, the global financial crisis and the COVID crisis). There is no financial crisis today (though plenty of mounting financial risks such as very high debt levels), but a crisis of expectations.

That is, the Fed and other large Western central banks have permitted investors to believe in the notion of a ‘Fed put’, or rather that central banks will rescue them if asset prices take a turn for the worse. The calls for an emergency rate cut betray this. The existence of the notion of a ‘Fed put’ makes life a lot more difficult for central bankers — it encourages excess risk taking and leverage, unproductive investment and arguably entrenches the already sizeable wealth effect in the US economy.⁴ From the point of view of monetary purists, it distorts the options open to central bankers.

 The second factor that I feel is relevant is the fiscal state of much of the Western economic world. Large deficits and near record high levels of debt make the transmission of monetary policy more difficult. High deficits – driven by spending – often go against the direction of monetary policy (there should really be better coordination between them), whilst high debt levels mean pockets of credit risk and groups of zombie companies (their interest payments swamp profits).

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