Confusion Reigns After Yellen Jackson Hole Speech

Well, we waited around all week only to get… nothing.

Here’s the bullet point summary of Yellen’s Jackson Hole speech:

  • FOMC STILL SEES GRADUAL HIKES APPROPRIATE OVER TIME

  • OUR ABILITY TO PREDICT FED RATE PATH IS QUITE LIMITED

  • FOMC EXPECTS LABOR MARKET TO CONTINUE TO STRENGTHEN

  • SOME ESTIMATES SHOW REAL NEUTRAL RATE CLOSE TO ZERO

  • FED'S ABILITY TO USE IOER TO PLAY ROLE FOR YRS TO COME

  • INVESTMENT REMAINS SOFT, FOREIGN DEMAND SUBDUED

  • MONETARY POLICY IS NOT ON A PRE-SET COURSE

  • FOMC NOT ACTIVELY CONSIDERING ADDITIONAL TOOLS

  • RATE-HIKE CASE `HAS STRENGTHENED IN RECENT MONTHS

Ok then. Just as we’ve been saying all week long, they’re just preserving their optionality. They have no idea where rates are headed as was pretty clearly indicated in an absurd graph that accompanied the Chair’s speech. Essentially, rates are going to be somewhere between zero and 4.5% going forward which is kind of like saying “stocks might go up, they might go down, or they might well stay the same.” It’s meaningless.

Deciphering this nonsense is almost impossible when it comes to assigning a “dovish” or “hawkish” label to it (after all, that’s the whole point of preserving optionality). Markets clearly can’t figure it out and vice chair Fischer didn’t help by offering his take:

  • YELLEN’S COMMENTS CONSISTENT WITH POSSIBLE SEPT. HIKE

  • WE'VE HAD VERY STRONG HIRING REPORTS RECENTLY

Pretty ridiculous, no? Fischer’s acting like some kind of bystander here, as though he’s interpreting Yellen’s remarks as an outsider. The takeaway here is that they’re doing this on purpose at this point. You roll out one person who leans dovish then a few hours later you roll out someone else and tell them to act hawkish. For their part, Citi is focusing on the possibility of more monetization:

“CitiFX Steven Englander thinks equities may be zooming in on Yellen opening the door to asset purchases - should a downturn occur. From the Yellen speech:”

"On the monetary policy side, future policymakers might choose to consider some additional tools that have been employed by other central banks, though adding them to our toolkit would require a very careful weighing of costs and benefits and, in some cases, could require legislation. For example, future policymakers may wish to explore the possibility of purchasing a broader range of assets."

Oh, great. So that probably means corporate bonds which will rapidly erode the yield pickup foreign investors can get in US credit.

Bill Gross is incredulous:

“She is opening the door to creating even greater asset bubbles as have the BOJ and ECB and SNB by purchasing corporate bonds and stocks.”

“To the extent that next month we see a decent job growth number, then I think for sure or close to for sure, you know, in September we’re going to see a Fed hike of 25 basis points. The market hadn’t expected that.”

So again, hawkish and dovish at the same time. “I don’t think there’s any surprise in the way she’s describing economy, just that it’s on course,” BofAML’s Ethan Harris told Bloomberg, in a phone interview. Gold and crude don’t know what to make of it all either:

Here’s a rather surreal rundown of Fed officials’ collective commentary since yesterday, via Bloomberg:

  • Yellen:

    • Case for next rate increase has “strengthened” in recent mos.

    • U.S. economy is approaching central bank’s goals on full employment, stable prices

    • No specific timing of next move was given

    • “The FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives”

  • Fed Vice Chairman Stanley Fischer on CNBC:

    • Yellen’s comments consistent with possible Sept. hike; still, “these are not things we know until we see the data”

    • Evidence shows that economy has strengthened; hiring reports in last 3 mos. have been “very strong”; next jobs report will weigh on Fed decision

    • Fed isn’t behind the curve

  • Cleveland Fed Pres. Loretta Mester on CNBC:

    • “Makes sense” to gradually move up rates

    • Economy is on track for growth pickup in 2H

    • “Every meeting is a live meeting”

  • Dallas Fed Pres. Robert Kaplan on Bloomberg Television:

    • Anticipated rate path likely to be “flatter”

    • Benchmark rate will likely rise more slowly than previously projected

    • U.S. and global growth slowing due to aging populations

  • Kaplan on CNBC: Case for rate hike is strengthening

  • Kansas City Fed Pres. Esther George on Bloomberg Television:

    • Inflation gains call for a near-term hike; “it’s time to move”

    • “It was time” to move even back in July

    • Not going to need to have high rates; “don’t think we need to cool off the economy”

  • St. Louis Fed’s James Bullard on Bloomberg TV:

    • Fed doing pretty well on dual goals

    • “Time to rethink” Fed’s normalization plans

    • Probably quite a bit of policy ammunition out there

  • Bullard on CNBC: “Agnostic” on when Fed hikes, could be this yr

You gotta love that last one from Bullard. It’s as if he too has thrown in the towel on this. He might as well have said “Hell, I don’t care anymore. Might be this year, might be next year, might be never.”

We would tell you to “trade accordingly”, but that would be meaningless here.

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