When Mario Draghi steps up to the podium at Jackson Hole on Friday, he could be forgiven for expressing some satisfaction.
It was during his previous appearance at the U.S. Federal Reserve’s symposium in Wyoming three years ago that the European Central Bank president went out on a limb to lay the groundwork for quantitative easing. Back then, the euro area faced the risk of deflation, with near-record unemployment and anemic economic growth. Now those concerns are largely gone and governors are preparing to discuss when they might wind down bond purchases.
But while traders are keyed up for any policy signals in this year’s speech, Draghi is unlikely to declare mission accomplished just yet. After more than 2 trillion euros ($2.4 trillion) of QE, inflation is still below target and officials are nervous that bullish comments might spark an unwarranted market tightening — as the ECB chief found in June when his mention of “reflationary forces” sent the euro and bond yields soaring.
“When Draghi starkly used such occasions to send a very strong message — for instance ‘whatever it takes’ in 2012 or in Jackson Hole in 2014 about the possibility of QE — every time it was about something quite binary,” Gilles Moec, chief European economist at Merrill Lynch in London, said in an interview with Bloomberg Television. “Now things are much more complex” and “a risk of being too granular at Jackson Hole is simply to be misunderstood.”
Draghi will speak at 1 p.m. local time at the symposium, a few hours after Fed Chair Janet Yellen. According to an ECB spokesman, he intends to stick to the theme of the event: “Fostering a Dynamic Global Economy.”
That still leaves room for him to address some of the factors that could influence the ECB’s Governing Council when it meets on Sept. 7. One item on the radar of investors is the euro, which has climbed almost 6 percent on a trade-weighted basis this year and 12 percent against the dollar.
The pace of the gain worries some policy makers, who fretted at their previous policy session about a potential overshoot that could hurt the recovery. Yet Draghi, who has previously spoken out when he feels the exchange rate is a problem, has said little on the topic. Governing Council members Ardo Hansson and Jens Weidmann argued this week that the appreciation largely reflects a strengthening economy and is no reason for concern.
“We’ve been moving in a corridor where I don’t think it’s a big change,” Hansson, Estonia’s central bank head, said in an interview in Tallinn on Wednesday. “It’s not surprising that markets might react and say, on balance, we’re more upbeat about Europe than we were a while ago, which will cause the currency to be a bit stronger.”
Draghi has repeatedly called for patience and prudence in setting a path for monetary stimulus, but has had little to say publicly since his last press conference on July 20. In a speech to Nobel economics laureates and young economists in the southern German town of Lindau on Wednesday, he focused on the importance of research for backing policy decisions and urged central bankers to reject old paradigms that no longer work.
In past speeches, he has occasionally made statements that effectively nudge the Governing Council into action. His 2012 pledge in London to do “whatever it takes” to save the euro led to the announcement of an emergency bond-purchase program.
At Jackson Hole in August 2014, he deviated from his published text to say that “inflation expectations exhibited significant declines at all horizons.” That was a reference to a speech earlier in the year when he identified falling consumer-price expectations as a prerequisite for QE. Large-scale bond-buying was announced the following January and started in March 2015.
Those purchases are scheduled to run at the current monthly pace of 60 billion euros until at least the end of this year and, with economic growth accelerating and unemployment falling, policy makers such as Weidmann want to wind them down in 2018.
Yet with inflation languishing at at 1.3 percent, well below the goal of just under 2 percent, the ECB president needs to find a way to ensure he can preserve the region’s monetary accommodation.
“When people first started talking about Jackson Hole there was the expectation that Draghi and the ECB would come full circle, because it was at Jackson Hole originally that he laid out the foundation for QE,” said Claus Vistesen, an economist at Pantheon Macroeconomics in Newcastle, U.K. “People expected that, as the economy was doing better, that he would be able to do the opposite this time. But there’s no room for that.”