Each year, Wyoming (western state of the United States), known for its snow-capped mountains, winter sports residences and national parks, becomes the center of the financial world. The year 2019 will not escape tradition with the Symposium of the American central bank – the Federal Reserve -, which will be held in Jackson Hole from August 22 to 24.
Rarely have there been so many topics of discussion: Sino-US trade war, currency war, war for technological leadership and global recession. Everything is pushing the financial markets into turmoil.
These risks motivated the Federal Reserve to cut its key rates in July to offset their recessionary effect on US activity. And it was in anticipation of this easing that the European Central Bank (ECB) got ahead of its colleague by announcing future monetary gestures. All investors are therefore in the dark: what will the Fed do in the coming months? Is July’s drop a one-shot event or the first easing of a cycle? Will the ECB really, in turn, lower its key rates? Will its rate on the deposit facility, already negative, be lowered further? Can the Bank of Japan be even more stimulating? The Bank of England, at the time of Brexit, should it do everything to avoid a recession?
Uncertain environment
These three days of meetings in Jackson Hole will begin to answer some of these questions. This is the hope of the financial community, because the Symposium will see the participation of central bankers, politicians and renowned economists. The financial world has changed. Are these central banks still independent?
The pressure exerted on the Fed by the American President, Donald Trump, and the appointment of Christine Lagarde as head of the ECB, considered political because it did not come from the seraglio of central bankers, have revived these fears! However, “A central bank president appointed for political reasons can be independent of political power, once appointed, explain Natixis experts. But the central bank can lose its independence if it finds itself compelled to participate in the country’s economic policy strategy, not by political pressure, but to avoid an economic or financial crisis. In the United States, can the Federal Reserve avoid acting to try to depreciate the dollar if the overall strategy of the country is a mercantilist strategy, additional growth being sought from the increase in sales of goods and services? to the rest of the world? they ask themselves. In the euro zone, can the ECB avoid ensuring the fiscal solvency of countries, if a number of countries pursue fiscal policies that could lead to loss of solvency and a public debt crisis without the fall in interest rate organized by the ECB? “
There are therefore many questions. The answers are far from obvious, especially in an environment of widespread negative interest rates. An unprecedented financial world.
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Currency war: Beijing, scapegoat
The currency war is a reality. What can the Bank of Japan or the Bank of England do, caught in a standoff between the United States, China and Europe? The Bank of Japan can only continue its extraordinary policy to avoid an appreciation of its currency. The yen indeed acts as a safe haven during periods of economic and financial stress. This is obviously the case with the trade war.
The Bank of England is also forced to show the greatest flexibility in its actions and in its communication. In the sights of the markets: Brexit, which should become a reality at the end of October, unless the Johnson government were to fall. It is not impossible because his majority is hanging by a thread, in this case with a single vote in Parliament.
The Central Bank of China is accused by Washington of manipulating its currency. But this review has “Unlikely to find an echo with the International Monetary Fund (IMF), as requested by the United States. Yuan weakness primarily reflects economic slowdown […]. What the United States is ultimately asking for is that China manipulate its currency by selling the dollar to artificially support the yuan ”, estimates Valentin Bissat (Mirabaud).
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