Big call on interest rates at Jackson Hole will echo around the world

Alamy/Loetscher Chlaus

The annual economic symposium in Jackson Hole, Wyoming, is a snooty affair even by the standards of the financial “masters of the universe”.

Attendance is “limited” to about 120 Federal Reserve officials, central bankers, financial professionals and academics. Journalists are “selected”, expected to pay (horror!) for the privilege of an invitation, and are not allowed to “overwhelm or influence the proceedings”.

The meeting is quirkily held under the auspices of the Federal Reserve Bank of Kansas City, whose officials were apparently keen on fly fishing in mountain lakes to accompany their financial deliberations when the event was first held there in 1982.

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In a normal year in the Rocky Mountain resort where it is staged it is all “gas at high altitude, which tends to cause flatulence”, as a participant once described it to me. (I’ve never been lucky enough to be “selected”.)

But 2024 is not a normal year. It is a US presidential election year, and the economics and finances of America will be under the microscope as voters weigh up Donald Trump versus Kamala Harris in November.

Just as significantly, this year’s symposium comes at a crucial time for US and global financial markets.

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The star turn will be Jay Powell, chairman of the Federal Reserve, who on Friday is expected to give some forward guidance on federal funds interest rates, the key global indicator in financial markets. Expect what he says to impact markets and business around the world, and no more so than in the Arabian Gulf.

Those markets are in a volatile state. Just a couple of weeks ago, some poor employment figures from the US, coupled with a badly timed interest rate rise in Japan, sent equity indices into worldwide nosedive, with experts loudly proclaiming “crash” ahead.

To highlight the volatility, last week markets clawed back all those losses as better economic data reassured investors that the US economy was not heading towards a recessionary hard landing.

But at the back of the minds of global investors is the hope that the Fed will come riding to their rescue with a substantial interest rate cut, down from the current range of 5.25 to 5.5 percent, the highest US rate in 23 years.

The question now for Powell is not so much “When?” as “How much?”.

With US inflation below 3 percent at the last announcement, it seems as though high interest rates have done the job in controlling consumer price inflation, and the way is open for a more benign rate regime, beginning next month.

But how much more benign? In the days after the short-lived crash, a consensus grew that the cut would have to be at least 50 basis points, and that it might even require two such reductions before the end of the year.

If Powell appears to be siding with the Democrats, it could spell big problems ahead in a Trump presidency

Now, with markets back on growth trajectory, the consensus is not so sure that is necessary.

The other issue is political. The Fed is supposed to be above politics but any action Powell takes now on interest rates, or even no action at all, will be seen against the background of an increasingly close and divisive presidential campaign.

No doubt Harris would welcome the “feelgood factor” a big interest rate cut by Powell would bring for her prospects. She is still struggling to earn voter trust on the question of managing the economy.

Conversely Trump would hate it. He has already questioned the basis of the Fed’s independence. If Powell appears to be siding with the Democrats, it could spell big problems ahead in a Trump presidency.

These may appear to be the details of US domestic politicking, but they matter to the whole world.

Global financial markets, including those in the Middle East, take their lead from the US. So far this year, despite wars and twin threats from protectionism and economic slowdown in China, they have managed to keep up a relentless pace of growth. The S&P 500 is only slightly below the all-time high it hit in July.

But there is no shortage of Cassandras pointing to bubble conditions in overvalued stocks, high levels of personal, corporate and government debt, and an all-round atmosphere of volatility and vulnerability.

A misjudged call by Powell on Friday will have profound implications for all of us.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He acts as a consultant to the Ministry of Energy of Saudi Arabia and is a media adviser to First Abu Dhabi Bank of the UAE