Jackson Hole Tests the Fed’s Framework

Summary

Morgan Stanley's Matthew Hornbach and Michael Gapen discuss the upcoming Jackson Hole Economic Symposium and what to expect from Fed Chair Warsh's opening remarks. Gapen expects little near-term forward guidance and instead sees a focus on longer-term framework questions. He also explains how market perceptions of the Fed's reaction function have shifted, with the yield curve flattening and then steepening. The conversation covers financial innovation topics and the debate over whether the Fed should communicate more or less.

• Jackson Hole is historically used by the Fed to communicate policy between July and September meetings.
• Gapen expects Chair Warsh to discuss framework questions rather than near-term rate or balance-sheet guidance.
• The symposium topic is financial innovation and its implications for payments and monetary policy.
• Conference papers may focus on CBDCs, stablecoins, bitcoin, deposit competition, and disintermediation.
• Gapen explains that markets initially saw Warsh's stance as conventional, causing curve flattening, but later steepened after he did not validate that reaction function.
• There is now market uncertainty about whether hot inflation would be met with rate hikes or balance-sheet action.
• Hornbach notes investors were frustrated by the lack of guidance before the July meeting, though the no-hike outcome was not a pricing surprise.
• Gapen argues the Fed is a market player and that saying less could reduce monetary policy transmission effectiveness.