Ms. Yellen’s remarks will be poured over by investors, primarily for clues on the future path of interest rates, with the prolonged period of low inflation now starting to unsettle some policy makers. The Fed had previously indicated that it plans to raise interest rates one more time this year but investors have been unconvinced for some time and recently, the skepticism has started to spill over into commentary from some policy makers.
Swing voters within the FOMC, while others just appear to lack the belief they once had. Should nothing change then expect the Fed will likely hold off until next year to raise interest rates further but with the committee appearing so split, it’s very difficult to call. This is reflected in current market implied rate hike expectations.
It is also worth noting that the Fed will effectively be tightening on 2 fronts, with the central bank set to announce in September that it plans to start reducing the size of its balance sheet which was built up in the aftermath of the financial crisis through quantitative easing.
The Fed’s balance sheet currently stands close to $4.5-T, a mark the many believe is too high.
If the Fed starts the process of balance sheet reduction next month, it may buy them a little more time on interest rates and allow them to wait for inflation to pick up before hiking again until next year.
Traders will be following Ms. Yellen’s remarks for any suggestion that the pace of rate hikes will be slower than expected.
Should this happen, we could see further weakness in USD, and US Treasury yields fall.
Mario Draghi: President ECB
The ECB has become obsessed, it seems, with the Euro rate and bond yields, and the unintentional tightening in financial conditions that these could trigger. At the end of June, Mr. Draghi suggested that recent progress could allow the central bank to pull back on unconventional measures a reference to tapering of asset purchases, and financial markets were quick to respond.
Despite the market’s reaction being far from extraordinary, officials at the ECB were quick to clarify his remarks and effectively reverse the moves that followed it. They are more concerned about what are relatively minor moves than they would have participants and analysts believe.
After this mishap, it seems likely that Mr. Draghi will keep to the script during his appearance at Jackson Hole and expect this script will be uneventful.
The next ECB meeting in September comes with new macroeconomic projections that will shape their decision on QE after December, but his speech Friday falls at a relatively illiquid time of the day (late afternoon) and month.
The ECB will want to avoid any sharp appreciation in the currency and a similar rise in bond yields at all costs.
If anything, Mr. Draghi may deliver a rather Dovish message that still leaves the door open to tapering at the end of the year while carefully managing the single currency lower.
There is always the potential that a warning of a policy shift comes from this annual gathering, and people should be prepared for significant volatility in case it occurs, but do not expect it to come from Mr. Draghi now.
Plus Ms. Yellen will remain tight lipped too, due the uncertain outlook on US inflation.
Have a terrific weekend.
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