Fly Fishing for the Fed

by | August 23, 2021

This week, Jackson Hole provides its customary spectacular backdrop for the Fed’s annual conference—even if some participants, including Fed Chairman Powell, will join by video link. 

Jackson Hole may be best known for its ‘deep and steep’ skiing, but a well-worn adage has it that folks come there for the powder but stay for the flyfishing. Indeed, flyfishing played an important, perhaps decisive, role in establishing the annual Fed conclave at the foot of the Tetons. Paul Volcker was the first Fed Chairman to attend the conference in 1982 and, according to lore, it was his passion for angling, not for economics, that hooked him.

Flyfishing also offers an apt metaphor for this year’s Fed conference. But this time the tables are turned. Instead of a giant Fed Chairman casting for wily trout, the drama centers on whether ‘cutthroat Powell’ (cutthroat is the dominant species of local trout) will rise to the fly cast on the waters’ surface.

This week, investors and journalists are fishing for clues about what the Fed intends. But Powell and the Fed are not just any trout. Direct questions about what the US central bank will do next are no more likely to elicit a useful response than an amateur’s splashy cast will interest a wary trout.

A trout faces a conundrum. It must feed. Yet it must also avoid a barbed artificial fly; one meticulously tied, invisibly attached to tippet, and gently cast on the ripples above the deep pool of the clear stream it calls home.

Chairman Powell also faces a conundrum. Sturdy job gains and a record number of unfilled vacancies point to an improving labor market. Inflation is cresting above 5%. Hence, the Fed’s macroeconomic objectives of restoring full employment and delivering average inflation around 2% are seemingly within grasp. That’s also the view of the Federal Reserve Open Market Committee, whose latest minutes suggest that most FOMC members favor a reduction of asset purchases, even if they cannot agree on when or by how much.

Yet Powell and the Fed are also cognizant of risks. The Delta Covid variant has spread rapidly. Anecdotal evidence suggests that even the vaccinated may be at risk. Young people appear more vulnerable. If schools cannot re-open fully, parents might not be able to return to work, slowing the recovery. Recoveries in other countries may also be at risk. Global growth surprise indices, which indicate whether incoming data are out- or underperforming consensus expectations, have turned negative.

The Fed is also watching markets. Bond yields have dipped, and the yield curve has flattened, signs that often presage weaker growth. Investor fascination with cyclical stocks (indicators of sustainable economic recovery) has waned. China’s crackdown on its tech sector has sent chills through emerging markets. Implied equity volatility, widely followed as the markets’ ‘fear gauge’, is once again rising. A positive second quarter earnings season is nearing its end, removing a powerful source of support for global equity markets. This past week, global equity markets wobbled. Many investors pivoted to more defensive allocations.

In short, on the eve of his Jackson Hole remarks, Chairman Powell is confronted with mixed news. Growth has accelerated in the past two quarters but appears to be peaking and even slowing. Inflation is overshooting and may be more persistent that previously thought, particularly if production or labor supply bottlenecks are not soon overcome. The pandemic is not over and poses new risks. Markets are becoming jittery.

Powell faces a further challenge. His term as chairman is up in early 2022 and it is no secret that he covets renomination. The last thing Powell wants to do is rock markets with some ill-considered remarks about slowing asset purchases (i.e., tapering) or other potential changes to Fed policy. Above all, he wants to avoid taking back any embarrassing statements. There is, however, precedent. Fed Chairman Ben Bernanke roiled markets in May 2013 when he hinted at Fed tapering, only to walk back those comments a few months later. A similar market ‘tantrum’ this time around could cost Powell his job.

So, Chairman Powell finds himself in a position like that of a hungry trout. He must rise to the right fly, nourishing his and the Fed’s reputation by making the right policy decisions at the right time. But he must avoid rising to the wrong fly, the one that snags him, from which he cannot wriggle free and ultimately could leave him high and dry.

Contrary to expectations, therefore, Powell may be reticent this week to say much about tapering or other aspects of monetary policy. Powell may instead focus his remarks on the state of the economy and the risks to the outlook. 

Powell may disappoint those angling for the Fed. But sometimes, that’s what a wily trout does if he wishes to swim another day.

About the Authors

Larry Hatheway

Larry Hatheway has over 25 years experience as an economist and multi-asset investment professional. He is co-founder, with Alexander Friedman, of Jackson Hole Economics, LLC, which offers commentary and analysis on the global economy, policy & politics, and their broad implications for capital markets. Prior to co-founding Jackson Hole Economics, LLC Larry worked at GAM Investments from 2015-2019 as Group Chief Economist and Global Head of Investment Solutions, where he was responsible for a team of 50 investment professionals managing over $10bn in assets. While at GAM, Larry authored numerous articles on the world economy, policy-making and multi-asset investment strategy. Larry was also the lead investment manager for various mandates, funds and an actively managed multi-asset index. Larry also served on the GAM Group Management Board, was Chairman of the GAM London Limited Board and served as member of the GAM Investment Management Limited Board. Larry was also Chairman of the GAM Diversity & Inclusion Committee. During his tenure at GAM, Larry was based in London, UK and Zurich, Switzerland. From 1992 until 2015 Larry worked at UBS Investment Bank as UBS Chief Economist (2005-2015), Head of Global Asset Allocation (2001-2012), Global Head of Fixed Income and Currency Strategy (1998-2001), Chief Economist, Asia (1995-1998) and Senior International Economist (1992-1995). During his tenure at UBS, Larry was also a standing member of the UBS Wealth Management Investment Committee. While at UBS, Larry worked in Zurich, Switzerland, London, UK (various occasions), Singapore and Stamford, CT. At both GAM Investments and UBS Investment Bank Larry was widely recognized for his appearances on Bloomberg TV, CNBC, the BBC, CNN and other media outlets. He frequently published articles and opinion pieces for Bloomberg, CNBC, Project Syndicate, and The Financial Times, among others. Before joining UBS in 1992, Larry held roles at the Federal Reserve (Board of Governors), Citibank and Manufacturers Hanover Trust. Larry Hatheway holds a PhD in Economics from the University of Texas, an MA in International Studies from the Johns Hopkins University, and a BA in History and German from Whitman College. Larry is married with four grown children and a loving Cairn Terrier, and resides in Wilson, WY.

Alex Friedman

Alex Friedman is the co-founder of Jackson Hole Economics, LLC, a private research organization which provides analysis on economics, politics, the environment and finance, and develops actionable ideas for how sustainable growth can be achieved. Friedman is a senior leader with two decades of experience growing and transforming organizations in the financial and non-profit industry. He was the CEO of GAM Investments in London and chairman of the firm’s executive board. Previously, he was the Global Chief Investment Officer of UBS Wealth Management in Zurich, chairman of the UBS global investment committee, and a member of the executive board of the private bank. Before moving to UBS, Alex Friedman served as the Chief Financial Officer of the Bill & Melinda Gates Foundation. He was a member of the foundation’s management committee, oversaw strategic planning, and managed a range of the day-to-day operating functions of the world’s largest philanthropic organization. Friedman also created the foundation’s program-related investments group, the largest impact investing philanthropic fund in the world. He started his career in corporate finance at Lazard. Friedman served as a White House Fellow in the Clinton administration and as an assistant to the U.S. Secretary of Defense. He is a member of the board of directors of Franklin Resources, Inc. (Franklin Templeton), a member of the Council on Foreign Relations, Chairman of the Advisory Board of Project Syndicate and a board member of the American Alpine Club. Friedman is a regular contributor to a range of newspapers and thought leadership groups and is also the author of Babu’s Bindi, and The Big Thing, both children’s books. He is an avid mountaineer and rock climber and led the first major climb to raise money for charity through an ascent of Mt. McKinley. Friedman holds a JD from Columbia Law School, where he was a Harlan Fiske Stone Scholar, an MBA from Columbia Business School, and a BA from Princeton University.

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