Jackson Hole Gives Yellen Stage to Keep 2016 Rate Rise on Radar

The Challenges Facing Central Bankers
  • Fed chair could keep September in play as jobs data improve
  • Global central bankers meet at mountain resort as growth lags

More than ever, the time is right for Janet Yellen to preserve her options.

QuickTake The Fed Lifts Off, Barely

That’s why when the Federal Reserve chair speaks Friday in Jackson Hole, Wyoming, any description she offers of the U.S. economy will probably be crafted to keep an interest-rate rise on the table for the central bank’s policy meeting next month -- without committing it to act.

Either way, September will be important for many of the world’s central bankers gathering at their annual mountain retreat this week, as near zero or negative policy rates struggle to lift global growth. The Bank of Japan is due to conclude a policy review and the European Central Bank will likely gauge the impact of the U.K.’s vote to leave the European Union and whether any stimulus response is necessary.

The formal topic of Yellen’s speech is the “monetary policy toolkit” and the conference itself, hosted by the Kansas City Fed Aug. 25-27, is “Designing Resilient Monetary Policy Frameworks for the Future.”

Both imply an academic focus on the challenges confronting policy makers that have prompted a rethink of conventional wisdom about the relationships between unemployment, inflation and interest rates, as well as the best tools to tackle the next recession.

Click here for quick explainer on the two big questions facing the Fed

But the conference, which was shifted to its current location in the Grand Teton National Park in 1982 to lure then-Fed Chairman Paul Volcker, an avid fly-fisherman, has also sometimes been the chosen venue to deliver important policy signals. Ben Bernanke, as Fed chairman, used speeches in 2010 and 2012 to lay out the case for more asset purchases.

Yellen, who didn’t attend last year, has shown less interest in telegraphing changes with her remarks at Jackson Hole. With economic growth picking up and the job market near full employment, she may want to use her first public comments since delivering congressional testimony in June to reinforce her view that rates should move up over time.

“I expect that she would want to preserve the option of moving in September without giving any very definite signal that they are ready to do it,” said Michael Woodford, a Columbia University economist whose 2012 paper at Jackson Hole helped to persuade the Fed to use more explicit forward guidance on interest rates.

Investors put the probability of a rate increase this year at just over 50 percent, according to the prices of federal funds futures contracts.

Fed officials are reviewing their assumptions about the level of interest rates consistent with neither spurring or braking the economy, known as the neutral rate, as productivity growth has slowed and unemployment has declined without lifting price pressures.

San Francisco Fed President John Williams, in an Aug. 15 essay, said the low neutral rate should prompt central bankers to consider adopting a higher inflation target. James Bullard, St. Louis Fed president, says the U.S. is mired in a low-productivity, low-growth regime that will require rates to be held below 1 percent for the next couple of years.

While Yellen might highlight the low neutral rate as an important longer-term factor, that won’t take a rate hike off the table for 2016.

“What I would infer is that a rate hike this year remains a good base case, but the pace of rate hikes will likely be slower” than implied by forecasts in June, said Roberto Perli, a former Fed official who’s now a partner at Cornerstone Macro LLC in Washington.

Two Camps

Fed officials were divided in July over the urgency to raise rates, according to minutes of their meeting last month, with some preferring to wait because inflation remained benign and others wanting to go soon as the labor market nears full employment. Their next policy meeting is Sept. 20-21 in Washington.

Vice Chairman Stanley Fischer on Sunday said the central bank was close to its goals and growth will pick up, an assessment Yellen could mirror.

“Yellen won’t want to rule out the option of moving in September,” said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore and a former Fed economist. “She would have to give a strong signal to convince markets they are likely to go in September, and I don’t think she’ll want to do that either.”

Global events have increasingly weighed on Fed policy, and played an important part at the annual Jackson Hole event as well.

No Draghi

European Central Bank President Mario Draghi will skip Jackson Hole for a second year, having used his 2014 appearance to accelerate his campaign to start quantitative easing in the euro area. Benoit Coeure, the ECB’s board member responsible for international relations, is due to attend, with investors primed for any signal of the central bank’s view of the economy ahead of a policy meeting on Sept. 8.

The future of central-bank activism is also under the microscope in Japan, where central bank governor Haruhiko Kuroda has embarked on a “Comprehensive Review” of stimulus measures, with results due next month, as investors question whether monetary policy there is reaching its limits.

That isn’t likely to mean that the Bank of Japan actually dials down its stimulus measures -- economists assume quite the opposite. The BOJ review is due to be presented to board members from Sept. 20.

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