News & analysis


The loonie dropped along with oil prices yesterday ahead of Bank of Canada Senior Deputy Governor Carolyn Wilkins’ speech at a workshop on the renewal of the BoC’s monetary policy framework. Wilkins mentioned in her speech that the Bank is reviewing various frameworks, as well as the monetary policy framework, looking at whether to maintain the current goal of targeting the annual inflation rate or adopt a different target in the years ahead. “We’ve identified some of the strengths and weaknesses of the different frameworks. But at this point, no single framework dominates on all margins,” Wilkins said. Her remarks follow a speech Tuesday by Deputy Governor Lawrence Schembri, who said the economic shock of the pandemic will test public confidence in the bank’s inflation target. BoC Governor Tiff Macklem will follow with a speech at the Jackson Hole symposium today.


The dollar is trading cautiously ahead of the main event of the week – the Jackson Hole symposium. Fed chair Jerome Powell’s speech at 14:10 BST will be today’s main focus. Many market participants are expecting Powell to use the opportunity to outline a major change in the Fed’s approach to inflation targeting. Previously, the FOMC was happy to raise rates in anticipation of inflation rising to its target, in order to avoid an inflationary “overshoot”, or period of above-target rates. This relied on confidence in the ability of policymakers to predict increases in inflation, primarily based on labour market conditions. The past decade has seen a general failure in this model across developed economies, as inflation remained low despite ostensibly tight labour markets. In response, the Fed is discussing changes to its targeting mechanism that will likely lead it to keep rates lower for longer as the labour market improves. In response, the Fed has already made significant moves towards a more symmetrical concept of inflation targeting – where short-term overshoots are of less concern. A formalisation of this approach is one major likely outcome of the Fed’s policy framework review, which is likely to be completed in the near future. Average inflation targeting, or an explicitly symmetrical policy target, would formalise this shift.  Another probable policy change is enhanced, clearer forward guidance that ties changes in monetary policy to specific outcomes in the economy. Powell is not likely to explicitly announce these major changes at today’s speech, but the way he described the macroeconomic and policy landscape will be of significant interest to markets for judging the way the wind is blowing at the Fed, and therefore the outlook for US macro markets in the medium term.


The euro is lacking clear direction against the dollar this morning ahead of the long-awaited Jackson Hole symposium. While Federal Reserve Chair Jerome Powell’s speech certainly is a headliner, there are other key central bankers set to speak at the event. From the European Central Bank, chief economist Philip Lane will participate in a panel discussion at 16:15 BST today. ECB board member Isabel Schnabel’s speech from yesterday may suggest the tone for today’s comments from Lane, as Schnabel stated that “negative rates can have side effects on banks’ profitability and risk-taking behaviour.” and that the side effects are likely to become more relevant over time. Schnabel also stated that there is “considerable uncertainty as to the precise level of the reversal rate and current estimates suggest that the ECB has not reached the effective lower bound”. The panel discussion Lane will participate in is entitled “Post-Pandemic Monetary Policy and the Effective Lower Bound”. In Italy, Spain and France, coronavirus cases further surged as outbreaks among returning tourists continue to expand, with Spain and France printing record numbers of new daily infections in the past week. All three countries rejected the possibility of introducing a new national lockdown, despite the grim numbers.


Sterling enjoyed a second day of gains versus both the euro and dollar yesterday, as markets braced for today’s landmark speech from Jerome Powell at the Fed’s Jackson Hole symposium, which is being held virtually this year, as opposed to at the famous Wyoming fly-fishing destination. Bank of England Chief Economist Andy Haldane said in a speech that central banks can only play a “modest” role in addressing economic inequality from the coronavirus crisis, while acknowledging that many inequalities in income, wealth, homelessness have been made worse by the crisis. The Financial Conduct Authority, in the meantime, told banks to offer a range of “tailored” repayment options to mortgage borrowers after payment holidays end in October. The Bank of England’s low interest rates, combined with the Government’s stamp duty holiday, are both policies whose marginal effect is likely to be higher house prices – a potential source of the inequality mentioned by Haldane.



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