Jackson Hole: What To Expect From Yellen? - Views From 15 Major Banks
Jackson Hole: Quick Take On Yellen's Speech
Yellen's highly anticipated remarks at Jackson Hole had at hawkish tilt, arguing that the case for a hike "has strengthened" in recent months, although with the usual caveats that the timing will be based on how the data unfold.
The bulk of her remarks defended the Fed's use of unconventional tools and paying interest on excess reserves. She also notes that some studies suggest that the funds rate might average only 2% over the cycle, given where the neutral rate might be, and that even an average rate of 3% implies difficulties in using conventional rate cuts to fight recessions. Nods are given to other suggestions, including forward guidance and broader asset purchases, but says that the Fed isnt at this point changing the 2% inflation target as some have suggested.
Overall, there really is no big surprise here, so we can put the Fed hype aside for now.
Global central bankers, stuck at zero, unite in plea for help from governments
Central bankers in charge of the vast bulk of the world's economy delved deep into the weeds of money markets and interest rates over a three-day conference here, and emerged with a common plea to their colleagues in the rest of government: please help.
Mired in a world of low growth, low inflation and low interest rates, officials from the Federal Reserve, Bank of Japan and the European Central Bank said their efforts to bolster the economy through monetary policy may falter unless elected leaders stepped forward with bold measures. These would range from immigration reform in Japan to structural changes to boost productivity and growth in the U.S. and Europe.
Without that, they said, it would be hard to convince markets and households that things will get better, and encourage the shift in mood many economists feel are needed to improve economic performance worldwide. During a Saturday session at the symposium, such a slump in expectations about inflation and about other aspects of the economy was cited as a central problem complicating central banks' efforts to reach inflation targets and dimming prospects in Japan and Europe.
ECB executive board member Benoit Coeure said the bank was working hard to prevent public expectations about inflation from becoming entrenched "on either side" - neither too high nor too low. But the slow pace of economic reform among European governments, he said, was damaging the effort.
"What we have seen since 2007 is half-baked and half-hearted structural reforms. That does not help supporting inflation expectations. That has helped entertain disinflationary expectations,” Coeure said.
Bank of Japan governor Haruhiko Kuroda said he is in regular talks with Japanese Prime Minister Shinzo Abe about opening Japan to more immigration and other politically sensitive changes needed to improve potential growth, currently estimated at only around one percent annually.
Fed Chair Janet Yellen devoted the final page of her keynote talk on possible monetary policy reforms to a list of fiscal and structural policies she feels would help the economy.
Fiscal policy was not on the formal agenda for the conference, but it was a steady part of the dialogue as policymakers thought through policies for a post-crisis world. One of the central worries is that households and businesses have become so cautious and set in their outlooks - expecting little growth and little inflation - that they do not respond in expected ways to the efforts central banks have made.
That has included flooding the financial system with cash, and voicing a steady commitment to their inflation targets in an effort to make people believe they will be met.
Kuroda acknowledged that household expectations have not moved, and said the BOJ was prepared to continue its battle to figure out how to shift them. In modern monetary theory, households and business expectations are felt to play a defining role in spending and investment decisions, and thus in shaping inflation and growth.
"Japanese inflation dynamics remain vulnerable," Kuroda said. "It could be that long-term inflation expectations are yet to be anchored in Japan" at the bank's 2 percent target.
The concern about expectations is a paradox. The Fed for example fought a difficult battle with inflation in the 1970s, hiking interest rates to recession-provoking levels and eventually winning a war of credibility over its ability to rein in price increases.
Some central bankers remain fearful of clipping that cord.
But they also are hunting for ways to jolt the economy out of its doldrums, and a fiscal push is a possible tool.
In a lunch address by Princeton University economist Christopher Sims, policymakers were told that it may take a massive program, large enough even to shock taxpayers into a different, inflationary view of the future.
"Fiscal expansion can replace ineffective monetary policy at the zero lower bound," Sims said. "It requires deficits aimed at, and conditioned on, generating inflation. The deficits must be seen as financed by future inflation, not future taxes or spending cuts."
It was not clear whether such ideas will catch on. But there was a broad sense here that the other side of government may need to up its game.
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Morgan Stanley: Yellen to disappoint USD bulls.
Given the plethora of Fed commentary in recent weeks,and not much else going on,attention has turned squarely to Yellen's speech at Jackson Hole tomorrow for any insight on the likelihood of a Fed rate hike this year. While the speech appears to be focused on more long-term policy (based on its title, "The Federal Reserve's Monetary Policy Toolkit"), many market participants are looking for an affirmation of hawkish Fed commentary by Dudley, Williams and Fischer. However, we think they will be disappointed as we expect Yellen to avoid the type of calendar guidance she gave in May and provide a dovish outlook amid almost universally weak data outside of the labor market.
RBC: Downside USD risks into Yellen speech.
On balance, we think the risk going into Yellen’s much-anticipated address is of disappointment, market expectations having been conditioned by a series of relatively hawkish comments from other Fed officials. Our economists note that Jackson Hole is really about the bigger picture. Yellen’s topic is “designing resilient monetary policy frameworks for the future” and it would appear that SF Fed President Williams has already provided something of a rough outline to consider. If Yellen broaches the subject in similar fashion to Williams (i.e., going so far as to promote an increase in the inflation target), it is hard to see how her remarks could be construed as anything but dovish. Markets go into her speech priced for around a 25% risk of a September hike and a 50% probability of a hike by year-end.
Citi: No s/t signal; 3 themes to gauge dovishness
With Janet Yellen set to speak at Jackson Hole, markets are becoming anxious for any clarity on the resumption of last December’s rate normalization. Yellen is unlikely to give a rate hike signal. Markets may look out for three themes to gauge her degree of dovishness: (1) the level of real interest rate; (2) the costs and benefits of “low-for-longer” interest rates; and (3) how the global and domestic backdrops stack up against the Fed’s tightening rubric.
BNPP: Yellen expected to deliver for the dollar.
The long-awaited speech by Fed Chair Yellen at the Fed’s Jackson Hole conference arrives at 14 GMT on Friday and we expect significant market impact. Our economics team expects the Chair to nudge markets towards pricing greater odds of a September rate hike, with the speech likely to emphasize the improved employment report and a preference to adjust policy soon. She may also attempt to clarify some of the market confusion around indications from FOMC members on the one hand that the longer-term terminal rate for the Fed funds rate is lower than they previously believed while on the other that there is a need to continue gradually moving the rate towards that equilibrium now. To be sure, Ms. Yellen is unlikely to explicitly signal a move in September and markets will not fully price a September hike in any event before the August employment report is released on September 2. With the USD having been weighed down by low nominal yields and negative real rates in recent weeks and months and our position analysis framework showing USD short positioning having built up, we think an adjustment in rates markets to reflect a near-term hike should coincide with a limited but significant adjustment higher in the USD.
Barclays: Yellen To Signal A Near-Term Hike.
Regarding the near-term path of policy, downward revisions to FOMC estimates for potential growth, the neutral rate of interest, and the natural rate of unemployment imply more dovish policy outcomes as evidenced by the flattening in the anticipated policy path since the FOMC first raised its policy rate last December. That said, we believe Chair Yellen will 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. FOMC worries about the labor market have been dispelled and a third straight solid employment report in August should reduce lingering concerns about inflation.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. A low growth, low interest rate environment may imply more frequent zero lower bound episodes. Hence, we expect debate at Jackson Hole about alternative approaches to monetary and fiscal policy that could better support the economy during future downturns, including automatic fiscal stabilizers, a higher inflation target, and nominal GDP targeting, among other items. We believe these discussions are about prudent planning for the future and do not imply that the Fed is actively considering changing its inflation targeting framework.
RBS: No short-term signal but risk-reward favors long USD
could Yellen reinforce Dudley’s comments at Jackson-Hole on Friday? We think not. It’s an academic conference that concentrates on long-term themes and has in recent years moved away from short-term policy signals. The tone may therefore reflect recent comments from Powell/Williams about low productivity growth and low neutral rates. But Yellen talking about lower long-term rates isn’t the same as dampening expectations of a near-term rate increase. We therefore still believe risk/reward favours USD upside against the EUR, GBP and JPY. Discussions about lower terminal rates should ensure that EM FX out-performs the G4 currencies.
Goldman Sachs: No big changes but if surprises, these 3 USD crosses will move the most
The Jackson Hole symposium is likely to feature a discussion of changes in the broader monetary policy framework, along the lines discussed by San Francisco Fed President Williams this week. However, we do not expect big changes anytime soon. Against this background, we today take an agnostic look at which Dollar crosses respond most to Fed surprises. To do this, we examine the partial correlation of key Dollar crosses with the two-year interest differential, controlling for things like oil price swings and global risk appetite. We find that GBP/$, $/JPY and NZD/$ should react most in the event of a surprise on Friday.
Deutsche Bank: Yellen To Retain The Optionality Of Hiking Next Month.
Fed Chair Yellen's speech at Jackson Hole should strike a moderately positive tone with respect to the near-term economic outlook. While we do not expect Yellen to explicitly pre-commit to raising interest rates at the September 20-21 FOMC meeting, she will no doubt want to retain the optionality of hiking next month if economic and financial conditions permit. To be sure, Yellen may couch any potential discussion of the near-term trajectory of interest rates within the context of a significantly lower terminal rate. The topic of this year's Jackson Hole Symposium is "Designing Resilient Monetary Policy Frameworks for the Future". Therefore, Yellen's speech will likely focus on some of the themes outlined last week by San Francisco Fed President Williams. ...We anticipate that Yellen's speech will outline the rationale for taking another step in the policy normalization process, but will also discuss the broader ramifications of a potentially lower equilibrium real rate.
Credit Agricole: No n-term signal; no major USD trend.
On the near-term outlook, we suspect those looking for a near-term policy signal will be disappointed. The Chair will likely remain non-committal on the timing of the next policy move, while not shutting the door to a potential hike at any of the remaining policy meetings this year. This will probably do little to restore the Fed’s credibility with market participants who have become unsure of the Fed’s data reaction function. Overall, we don’t expect the speech to catalyze a major USD trend, especially given the proximity of the nonfarm payrolls report next week. We still see one Fed hike before the end of the year (in December) which should support the USD in the near-term. However, if Yellen’s Jackson Hole speech and the subsequent September FOMC meeting signal an overall slower and shallower path of policy tightening, the USD’s medium-term prospects are much less certain.
Danske: No exact timing of next hike but will signal its coming closer.
The long-awaited speech at Jackson Hole by Fed Chairman Janet Yellen is due today at 16:00 CET. She will speak on the Fed’s ‘monetary tool kit’ but is also expected to give her view on the timing of a rate hike. She is not likely to be precise on the timing but will probably signal that a rate hike has come closer again with the labour market strengthening and global risks decreased. A rising number of Fed members have signalled that they see a case for a rate hike being not too far away. Vice chairman Dudley, who is normally very dovish, said last week that an increase was up for discussion at the 21 September meeting. The other vice chairman Fischer said this week that the Fed was close to meeting its targets. Yesterday, Dallas Fed chief Kaplan said the case for a rate hike was ‘strengthening’ but that it should happen gradually. The market is pricing in a 32% probability of a September hike and 57% of a December hike.
SocGen: Neutral: Not A recipe for volatility or USD strength.
As the Federal Reserve welcomes the great and good to Wyoming to discuss “Designing resilient monetary policy frameworks for the future”, weaker productivity growth, slower GDP trends and a lower equilibrium for real interest rates will all feature. Resilient frameworks are ones that can cope with these new realities. The inference, that the FOMC will only tighten policy at a funereal pace, is hardly a recipe for a soaring dollar...The market’s default position is to wait for Ms Yellen’s speech and then conclude that the Fed will still only be hiking rates so slowly that we’ll hardly notice when they eventually do. That’s not a recipe for either volatility or much in the way of dollar strength.
BofA Merrill: No guidance on next hike; limited USD impact.
The key new information that the rates and FX markets will receive this week will be through the Fed's economic symposium in Jackson Hole. The theme of this year's symposium is "Designing Resilient Monetary Policy Frameworks for the Future", which should focus on medium- to longer-term policy issues and operational structures. We expect Fed Chair Yellen's remarks on Friday will focus on these topics as opposed to providing explicit guidance on the near-term policy outlook. If Chair Yellen does provide policy guidance, she is likely to reiterate her prior remarks noting an additional rate hike is possible in coming months assuming economic data continue to show signs of improvement. We do not expect her comments to have much of an impact on market pricing for the near-term Fed outlook and believe that the market will continue to assign very low odds to a September rate move. It is likely that the Fed will want to preserve the option of a December rate hike and believe the market should continue to assign roughly 50% odds of a rate hike by the end of this year, which remains our economist's expectation for the timing of the Fed's next move. As a result, the USD impact is likely to be limited with the currency likely to take its cue more from the broader risk environment. An at bay Fed will support a continuation of the pro-carry environment we have been in and risks seeing the dollar come under further pressure until data justify a more significant and sustained re-pricing of 2017 and 2018 expectations. Ultimately, dollar downside is limited by the residual expectation of some Fed hikes, set against continued policy easing by many G10 central banks.
ABN AMRO: Cautious stance; wait & see approach.
Our expectation is that Chair Yellen will continue to take a cautious wait and see stance to monetary policy and will provide no strong signal of an imminent rate hike. Indeed, our base case remains that the Fed will be on hold until early next year. The longer-term discussion on declining neutral rates (given lower trend GDP/productivity growth) and the consequences for monetary policy should also be interesting, but we do not expect any change in the Fed's policy framework any time soon.
ANZ: Technical in nature but room for surprises.
The title of the speech is the ‘The Federal Reserve’s Monetary Policy Toolkit’, which fits in with the topic of the conference being ‘Designing Resilient Monetary Policy Frameworks for the Future’. So there is plenty of room for her to touch on a number of topical and interesting issues. And while it is possible that her comments will have a longer-term feel about them and could also be reasonably technical in nature, markets will be particularly interested if she follows on from some of her Fed colleagues (including George and Kaplan overnight) that have signalled recently that markets are underpricing potential upcoming Fed tightening. Those comments haven’t really shifted market pricing, but if the boss was to signal it too, markets would likely listen.
LLoyds: Technical in nature; no immediate market impact.
After a more hawkish bias from Fed members over the last two weeks, particularly Vice-Chair Fischer last weekend, the markets’ focus today will be on the Fed’s annual symposium at Jackson Hole and comments from Fed Chair Yellen. Much of the discussion over the next few days will be highly technical in nature and concern medium-term policy issues and that is unlikely to have immediate market implications. Yellen, however, may at least touch on the likelihood of a Fed interest rate hike before year end. Failure to do so, we feel, would disappoint the market and see bond yields and the USD sell off somewhat.