The following is Bank of America Merrill Lynch’s preview for Fed’s Yellen speech at this week’s Jackson Hole event. Overall, BofA thinks that Jackson Hole is an unlikely venue for Fed Chair Yellen to signal a policy shift, but expects the only hiking talk will be on the trails.
Going into this year’s meeting, it does not appear that the FOMC is leaning toward a policy change as in 2010, let alone on the verge of a big shift as in 2012. Instead, the Fed is in a bit of a limbo state as it waits for clear evidence that 1Q GDP was a fluke and convincing signs of stronger wages. With significant policy changes a long way off, and with the intense market focus on Jackson Hole, we expect the Fed Chair to try to say nothing interesting about the policy outlook.
Clearly, the conference topic — “Re-Evaluating Labor Market Dynamics” — offers plenty of room for discussion. Hence, if the Chair wants to be a bit more interesting, presumably, she will talk a bit about why she still sees a long recovery ahead in the labor market, pointing to the weakness in wages and broader measures of slack. In the past, the papers have been released to participants before the general public, creating some potential for a pre-conference market reaction. However, the papers usually stoke more economic debate than market action. The participants include the usual cast of critics who warn of inflation and asset bubbles every year — recall that in 2008, just before the markets and economy collapsed, conference participants were much more worried about inflation than about a credit crunch. This year, as in the past, criticism of the Fed is a useful “stress test” for Chair Yellen and her allies, but is usually a poor signal of the likely path of Fed policy.