Investment Strategy Insights: Move over, central banks: markets will soon follow fiscal policy

Ahead of this year’s Jackson Hole symposium, titled “Designing Resilient Monetary Frameworks for the Future,” it seemed like Federal Reserve Chair Janet Yellen might signal something big. Instead, she expressed confidence in the adequacy of today’s Fed tool kit.

The last time Jackson Hole elevated a new policy tool, it was forward guidance. While this won plaudits at first, it only works in the real world when the Fed is date-dependent instead of data-dependent. Otherwise it draws attention to the fact that the Fed’s forecasts are no better than anyone else’s. While Yellen specifically reaffirmed her support of forward guidance, to date it has only diminished the Fed’s prestige and influence over markets, ultimately lessening its ability to conduct monetary policy. In a short time, markets have come to lead the Fed rather than the other way around.

Governor Haruhiko Kuroda also reaffirmed his support for the Bank of Japan’s (BOJ) three policy tools: quantitative easing, qualitative easing, and negative interest rates. Yet the poor timing in introducing negative interest rates has also left the BOJ with less control, with currency markets challenging the bank’s power via a strengthening yen. European Central Bank President Mario Draghi skipped the meeting.

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