Jackson Hole Preview: Do Not Expect Policy Shift
Via BofAML's Ethan Harris,
Gone fly fishing
The Kansas City Fed’s conference has been around since 1978, but it only gained notoriety in 1982 when it was moved to Jackson Hole, luring an avid fly fisherman named Paul Volcker. Since then, the conference has alternated between topics of market interest and more obscure themes, but one thing has been constant: the Chair’s speech on Friday morning. Chair Greenspan clearly relished the opportunity; indeed, in his last year as Chair, the topic of the conference was “The Greenspan Era: Lessons for the future.”
During the Bernanke and Yellen “era,” the conference continues to feature interesting research, but it has become less of a venue for communicating policy. The new Chairs want to move away from the cult of personality around the Chair in favor of a committee approach. This low-profile approach is one of the reasons Bernanke did not attend last year’s conference. Jackson Hole occurs just before an FOMC meeting (not to mention a payroll report) and signaling a shift in policy at the meeting would front-run the Committee.
In the new model, communication occurs through official channels that involve the whole committee. Indeed, the Fed has expanded these official channels. They now update their forecasts four times a year instead of twice. They have added funds rate forecasts, and they now have a press conference to explain each of these forecast changes. In this framework, the Jackson Hole speech becomes one of several speaking venues for the Chair over the course of the year. Sometimes it is important; often it is not.
This description may seem at odds with recent Jackson Hole events (Chart 1). Didn’t Bernanke often use the event to signal major policy changes? Looking back, the signals from the Chairman speeches are clearer in hindsight than in real time.
For example, Chart 2 compares the change in 10-year yields on the day of Bernanke’s speech at Jackson Hole to the change in yields over the rest of the year. Sometimes the speech provides a hint of things to come, but overall, there is no correlation between market response to the speech and the market movement over the rest of the year.
Consider the signals for each of the last four years.
2010: Leaning dovish Going into the 2010 conference, the US economy was losing momentum. We titled our weekly “One is the loneliest number” because we expected GDP growth to have a one-handle that quarter. In his speech, Bernanke focused on the logic behind policy rather than a specific road map, talking at length about the “benefits and drawbacks” of each policy tool. As we wrote at the time, “the speech buys time for the Fed to determine if the economy is weak enough to warrant action.” The Fed did eventually adopt QE2, but it wasn’t until three months later, after a long string of additional hints. The “urban legend” is that Bernanke clearly signaled QE2 at Jackson Hole; the truth is he nudged along an idea that was already in the works.
2011: Focus on fiscal Following the 2011 conference, we wrote, “as expected, Bernanke kicked off the Jackson Hole confab with a dovish view of the economy, but offered no specific promises for further policy actions.” The bond market rallied, but as Wall Street reporter Mark Gongloff wrote, “He really seems to be saying we are on our own for a while … that makes today’s rally a bit of a head scratcher.” No signal here.
2012: The case for more QE At this conference, Bernanke gave his most decisive Jackson Hole speech. The economy had been slipping, with both growth and inflation falling. Bernanke offered a strong defense of QE1 and QE2, while hinting that another dose was possible. This correctly signaled the policy shift at the September 13 FOMC meeting.
2013: The hole at Jackson In the Spring of 2013, Bernanke announced that he would not attend Jackson Hole for personal reasons, breaking a long-time tradition. Janet Yellen also demurred, choosing to host a panel rather than speak. This was part of a long hiatus from public speaking by Yellen in the run up to her vetting as a potential Fed chair. Over this period, New York President Dudley also did not speak. This is one of the longest periods with no comment from “the big three” in many years. In our view, it contributed to the extreme market mispricing of the likelihood of Fed tapering at the September FOMC meeting. As expected, absent speeches from either Bernanke or Yellen the conference was a non-event from a markets perspective.
2014: Hitting the trails, but no hiking talk
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.
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