Will Jackson Hole Turn Out To Be Another FED Eyewash?

The Federal Reserve’s Economic Symposium to be held at Jackson Hole, WY, today on 26th August 2016, is the at the epicenter of speculative bets. Conducted by the US Federal Reserve the primary agenda on the table would be to iron out the differences cropping out of economic imbalance and boost growth, thereby spurring inflation amongst the top economies of the world. 

The Symposium is a closed door conference attended by Central Bankers, Finance Ministers, and Academicians across a wide spectrum of troubled Economies. Currently, the focus remains on the issues that continue to the dent the growth prospects in the World. A key feature of the event is to lay out possible forward guidance for the future and analyze issues relating to global liquidity outages. The World Economy is now concerned about the Economic Growth and Worldwide productivity. 

Markets addicted to low rates-   

Markets had welcomed ultra low-interest rates rolled out by the Fed, post the sub-prime mortgage crisis. A possible rate hike by the Fed would lead to contagion effects that would adversely impact the interest cost of dollar dominated loans which might trigger panic amongst Emerging Economies. 

Negative Interest Rates- 

Mario Draghi, the ECB President along with Haruhiko Kuroda the Bank of Japan, Governor, have pushed their economy into negative interest territories. Negative rates mean that the Commercial Banks must pay to keep their funds on deposit with the Central Bank. In the event of a rate cut Banks would lose a large portion of the interest pie.

Stagnant Euro-zone

The Euro-zone is still recovering from the wounds of Brexit, topping that the Economy is fast slipping into a recession. People in Germany, France, and Italy are saving more than they spend, leaving the Inflation Curve in a lurch. Thus the economy is not being able to generate enough employment to meet its optimum inflation targets.  

Currency wars

The World Economy is actively engaged in aggressive Currency Devaluation where major Economies reduce their Currency Exchange rates to boost their Exports and Economic Growth. Japan is expected to increase its Monetary Easing and Devalue its Currency. Similar Economic Strategies have been followed by the European Central Bank. Such devaluation policies leave the USD stronger; a further rate hike would strengthen USD even more, which will adversely impact US Exports and its economic growth prospects. 

The World Economy can only prosper and be brought back to growth if actual fiscal reforms are enforced. Monetary policy can merely solve liquidity issues but aren’t sufficient enough to bring in actual Economic Growth. For an Economy to grow, there must be the rise in GDP. An Economy’s GDP based on the Consumption Expenditure, Government spending, Business Investment and Net Exports. Monetary policy can only act as a catalyst for growth, so if we are to expect actual growth strong Fiscal Reforms must be done.

You can also read the impact of FED Meeting on the stock market in our Stock Market Morning Report.