Investing.com – Markets looked forward to Federal Reserve (Fed) chair Janet Yellen’s speech on Friday to gauge her stance on monetary policy and search for hints for when a rate hike could arrive.
Thursday will kick off the three-day Economic Symposium sponsored by the Kansas City Fed at Jackson Hole, Wyoming with this year’s topic being “Designing Resilient Monetary Policy Frameworks for the Future".
On an annual basis since 1978 the Kansas City Fed has gathered together prominent central bankers, finance ministers, academics, and financial market participants from around the world to discuss the economic issues, implications, and policy options.
The event garnered particular attention in 2010 when former Fed chair Ben Bernanke used his speech to signal the second round of quantitative easing, known as QE2.
With Yellen having skipped attendance in 2015, and given market speculation on when the Fed will return to the path of policy normalization, traders were on edge to see if she will give signals on future tightening.
Yellen is scheduled to give a speech titled “The Federal Reserve's Monetary Policy Toolkit” on Friday at 14:00GMT, or 10:00AM ET.
Yellen to signal on policy or “play Goldilocks”?
By and large, most experts expect Yellen to be upbeat on recent economic data and provide an optimistic outlook.
With regard to monetary policy, Deutsche Bank strategists suggested that the Fed chair will want to leave her options open and state that the September meeting is “definitely ‘live’ albeit data dependent.”
“However, the July retail sales data affirmed that nothing more than this can be expected,” they added.
Economists at HSBC expect Yellen to communicate that the “fog is lifting” and suggest that the Fed is closer to its goals of fully employment and 2% inflation.
UBS looked for her “speech to support the view for a hike on the way in December”.
Going further, Barclays believes that Yellen could “use the opportunity to signal the FOMC’s growing confidence in the outlook for activity and inflation, given the rebound in labor markets since June and the solid rise in household spending in Q2 GDP” and, despite lingering inflation concerns, expects the Fed chief to “deliver a stronger signal about the likelihood of a near-term rate hike”.
However, not everyone held high hopes for Yellen shedding light on the future path of monetary policy.
“She will probably attempt to play the Goldilocks card – not too hot, not too cold, we’ll decide when to move rates when it’s just right, whatever that means,” experts from ETF Capital Management said, though they did admit it was possible she could indicate the “possibility of a September hike”.
“We do not expect much insight about the timing of the next Fed hike from Yellen’s speech,” Bank of America Merrill Lynch economists wrote point blank in a note to clients.
They explained that, given the topic at hand, Yellen was more likely to follow the script laid forth by San Francisco Fed president John Williams last week that identified the need for the creation of new policies to deal with economic downturns.
These experts added that the discussion could include the “natural” interest rate, essentially the market-based rate of inflation, but noted that the focus on these topics could give market participants a clear takeaway.
“From the Fed’s perspective, this will involve balancing near-term data, which calls for hikes…with longer-term concerns, which require patience,” they said.
“The result is a very shallow Fed hiking cycle,” they added.
Along these lines, strategists at Daiwa Capital Markets suggested that Yellen could offer clues on the potential changes in the Fed’s policy stance.
“This year, we might see a blending of these two types of presentations: the Fed chair offering clues on Fed thinking, but clues related to long-term strategies rather than hints about upcoming changes in the stance of policy,” they explained.
Moody’s Analytics also downplayed the possibility of interest rate hints from the speech.
"There is roughly a month between the conference and the FOMC meeting, which is an eternity for the Fed, as a lot can happen," they said.
Data may reshift the balance post-Yellen
In that regard, many analysts felt the data-dependent Fed would take its cue on rates from the August employment report that will be released on September 2.
“Another firm report for August will increase FOMC members’ confidence further ahead of next month’s meeting,” RBS said.
“Another solid employment report would go a long way in building the case for a September rate hike,” BMO Capital Markets agreed.
Hence, “the payroll number is likely to be more important than the Jackson Hole speech,” Deutsche Bank affirmed.
Morgan Stanley, however, argued that “inflation holds the key to further Fed rate hikes.”
They pointed out that the core PCE (personal consumption expenditures) inflation was at 1.6% in June and forecast July’s data, to be released on August 29, to come out at 1.5%, dropping further from the Fed’s target of 2% and removing pressure to hike rates.
Current expectations for next rate hike
Most economists expect the Fed to make its next move in December, one full year after the first hike in a decade.
About 71% of 62 experts surveyed by the Wall Street Journal at the beginning of August forecast a December move, while 95 economists polled by Reuters showed a median probability of 58% for a hike in the last month of the year.
Deutsche Bank economists followed this line of thinking with expectations that Yellen will provide a “ready” warning on Friday to deliver a “set” message at the September Fed meeting and then “go” in December.
Wunderlich Securities forecast that the Fed would move this year because it had “run out of excuses”.
“Brexit didn't stop the world from spinning, and the election shouldn't be a factor," these strategists explained.
FAO Economics also warned that the Fed was in a position of needing to justify the first rate hike last December.
“The longer they go without following up on the December rate hike makes them even more vulnerable to the charge that the move as a mistake,” these economists said.
However, a minority of experts were still expecting the Fed to increase the price of money as early as the next meeting.
BNP Paribas pointed out that the July minutes did not have the reference of the strong employment report that was released afterwards.
“The Fed is biased towards hiking,” they said, adding that “they will hike unless they see a downside risk.”
Barclays also included itself among experts expecting tightening to continue at the next meeting.
“We expect Yellen to deliver a stronger signal about the likelihood of a near-term rate hike and retain our view that the next increase will occur in September,” they said in a note on Jackson Hole.
Still, financial markets disagreed, pricing in only a 15% chance of a rate hike in September, according to Investing.com’s Fed Rate Monitor Tool.
However, the odds for a move in December rose to 51.8% on Monday, compared to 46.2% the prior session, on the back of hawkish comments from Fed vice chair Stanley Fischer.
In that light, Yellen may have the chance to tip the scale.
Stay up-to-date on market expectations for future Fed policy moves by visiting:
http://www.investing.com/central-banks/fed-rate-monitor