Central Banking in a Changing World

This weekend was the annual meeting of Central Bankers at Jackson Hole, Wyoming. Usually this is a high profile event with the world’s most important banking chiefs all giving speeches, providing a great insight for markets of what the future holds for monetary policy.


This year marked 10 years since the financial crisis and a distinctly muted event in which the heads of the Bank of England, Bank of Japan and ECB were all missing. It therefore had a distinctly different feel and most of what was discussed was about the changing face of the world economy and how central banking needs to evolve with it.


The most keenly awaited speech was made by Jerome Powell, who was attending his first Jackson Hole symposium since becoming head of the Federal Reserve earlier this year. The only market insight to be gained from his statements is that a hike is still very likely in September, and December should still be considered odds on for a second rate rise before the end of the year.


This flies in the face of the statements made by Trump in recent weeks, where he stated that he would like to see the Fed not increase rates any further. Powell addressed this point directly by stating that the Fed has an independent mandate to make monetary policy without consideration of the political environment. Currently the economy appears to be stabilised with inflation around the 2% target and he has seen no need to deviate from the openly stated plan of gradual normalisation of policy. The only addendum to this was made by another Fed Chair who added that there may be a pause at the point where rates have struck an equilibrium where the existing rate is neither supporting nor slowing the economy.


Beyond these comments Powell raised a very interesting point: has the Fed focused too much on economic theory, rather than analysing the economic data as it has unfolded? He believes so and used the example of the disconnect between wage growth and unemployment. How it should occur in theory and how it has played out in practice have been two very different things. As such he plans to change the way the bank operates from previous regimes and move away from theory.


He did not imply any clear answers as to what this will mean, but it was in line with the wider theme of the conference, which was that Central Banks need to evolve their thinking in the face of a global economic environment which is also evolving.


Primary to this was the paper presented by Harvard academic Alberto Cavallo who discussed what is being referred to as the ‘Amazon Effect’. Due to companies such as Amazon creating strong downward pressure on retail prices it has a combined effect of decreasing competition as it eats market share and, more importantly, opening up consumers to price shocks.
Cavallo reports that over the last decade price elasticity has increased by such that the time between price changes has dropped from 6.5 to 3.7 months. This means that sudden one-off price spikes in commodities will reach consumers at a much faster pace and in a shaper fashion.


The key concern is that central banks’ ability to keep inflation steady through monetary policy becomes weaker as the speed of pass-through increases. In an extreme scenario it would prevent stabilisation of inflation via interest rate changes as any effects of policy would take too long to take effect. Even in less drastic circumstances however, central banks need to themselves increase the speed of response.


To compound the relevance to the current economic climate the three largest stated ways in which these price movements could occur are via commodity spikes, currency fluctuations and trade tariffs. The latter being the largest concern for all attendees at the weekend, for understandable reasons.


The conclusion of this discussion was that increased competition and changing market dynamics has reduced margins and benefitted consumers by providing lower prices. However, in the process the likes of Amazon and Apple have managed to capture such a large market share that they may have overtaken central banks in the question of who has the most say in driving or managing macro-economic indicators.



Author: Andrew Stewart 


White Papers



FX Hedging:

10 Common Pitfalls


Commodity & FX Risk:

An Integrated Approach


The Corporate Use of Credit Derivatives:

Where Next?


Corporate Hedger’s Guide to Basel III


Currency Volatility – Are markets nearing an inflection point?



FX Risk


“Validus designed an innovative and practical hedging strategy to address our underlying FX risk in the context of very distinct and diverse sources of competition. We are delighted with the outcome and impressed with their on-going response to the changing business and market dynamics”.


Paul Stobbs, Managing Director, Attraction World


Private Equity


 “The Validus team understand how private equity thinks about financial risk management issues and they are rigorous in the way they help our portfolio companies to understand and mitigate their risks.”


James Markham, Partner – Portfolio Management, Graphite Capital LLP


FX and Commodity Risk


“Validus provides us with independent strategic advice relating to our long-term currency and commodity risk management program.  The people are extremely capable and collaborate very well with our finance and operations teams here at JD Irving.”


Mark Bettle, Director, J.D. Irving Ltd.


FX  Risk


 “Validus developed a tailored hedging solution to mitigate the risks from our unique combination of existing supplier agreements. The implementation and management of this rolling hedging programme with our FX service providers has been expertly and efficiently handled”.  


Mark Goldby, Finance Director, SMS Electronics Ltd.


Commodity Risk


“Validus worked with us to develop a comprehensive commodity risk management programme – their analysis was both insightful and actionable.   We particularly value their independence, and they continue to work alongside our internal team to ensure our commodity price risks are managed effectively”

Gerry Gray, Finance Director, Strix Ltd.


FX, Commodity & Interest Rate Risk


“Validus comes up with risk management solutions that are innovative and comprehensive but practical to implement, that is their strength compared to other consulting companies we have worked with in the past.  Validus provided valuable insights into how FX, interest rate and commodity risks impact our organisation, and provide actionable recommendations and solutions.”


Andrew Ayres, Finance Director, U-POL Ltd.

Recent Comments