Jackson Hole: 'Tremendous' Downside Risks If Yellen Doesn't Go Full-Dovish

Tyler Durden's picture

Via Citi's Steven Englander,

The consensus expectation is overwhelming that Fed Chair Yellen will deliver a dovish message at Jackson Hole. Macro investors have largely eliminated their short Treasury position and look to be long risk, particularly via equities and EM. FX positioning is long USD and long EM, the long USD largely because the euro zone economy is slipping again and the ECB is hinting at further ease. Our question is whether Yellen can be more dovish than what is now priced in, not whether she will be dovish on the Richter scale of dovishness.
We would go into this week long USDJPY.  There is upside to USDJPY if geopolitical tensions ease further or US rates back up. Given the focus on Yellen’s talk, we are also a bit worried that investors will be surprised if FOMC Minutes read somewhat hawkishly.
EM would be the big winner if Yellen succeed in surprising on the dovish side. However we worry that dovishness is increasingly anticipated and that by the time we get to her talk, anything less than 'full dovishness' will be a disappointment.
‘Full dovish’ means moving the goal posts on the targets.
Keeping the current targets, even accompanied by rhetoric and optimism, is hawkish because it suggests that normalization is coming as well get closer to the targets.
There are three ways by which Yellen can express dovishness, but only one that breaks new ground:

i) Full dovish

1) Argue that the natural rate is less than 5 ¼ -  5 ½ %


2) Advocate for a temporary overshoot of the inflation target


3) Emphasize the uncertainty around NAIRU estimates that tightening can wait till there is real evidence of accelerating inflation.


4) Introduce a soft wage target of about 3.5%, consistent with  aspirational 1.5% productivity growth and 2% unit labor cost growth

ii) Semi dovish

1) Make the case that there is no sustained inflation likely without accelerating wage growth and there is little broad evidence for such a pickup, but keep existing inflation and unemployment targets


2) Introduce a new labor market indicator that captures the slack she feels that the unemployment rate misses, but again keep to existing targets

iii) Contingent dovish

1) Forecasting a pickup in productivity and labor force participation that will limit the need for tightening

Full dovish goes beyond anything she has stated explicitly in her comments. It would give stimulus more room on unemployment, inflation or both, and  lead to yields dropping even further, taking the USD with them. There are straightforward arguments to justify full dovish, but the Chair has not advocated any of them so far, so it would clearly plant her among the most committed doves.
Semi dovish may generate a strong initial market reaction if it looks as if it is introducing new factors into the policy equation but is much more ambiguous. 'Low wages imply low inflation' is a property of most inflation models but much weaker than  saying that wage growth is now a target.  Were inflation to pick up for others reasons the Fed would still tighten, even if wages remained soft. Similarly it  is unclear what it means to say that the unemployment rate understates slack, but 5 ¼ - 5 ½% is the target anyway. While we would focus on whether the goalposts are being shifted, semi dovish can sound very dovish until it becomes clear whether there is any functional shift in the FOMC’s goals.
Contingent dovish is the argument she has put forward for a long time. It sounds more dovish than it is because no one has a real handle on the drivers of trend productivity growth and the US supply side has disappointed badly.  Both the participation rate and productivity growth are at weak levels and there is no compelling case that either will pick up.  The safest assumption is that trend productivity growth over the next three years is what it was the last three years, and that participation rates are unlikely to surge.
Moreover, if the supply side does not improve, the Fed will have to start withdrawing stimulus as soon as the inflation and unemployment targets are approached. So even though the stress on supply side response sounds dovish, at this stage of the cycle it may actually turn out to be hawkish.

The hawkish surprise would be an acknowledgment that they were approaching their dual mandate targets  faster than expected. Even repeating  the FOMC statement would be something of a hawkish surprise given how far markets have moved in the dovish direction. Dec 2015 and 2016 Eurodollar rates are at the low end of their range of the past 15 months so there is no market concern on the pace of tapering. Were she simply to say that the targets are the targets and they will begin to reduce stimulus as they are approached, it would be a tremendous let down and viewed as very hawkish versus expectations.
Some notes:
The case for full dovish
The full dovish case basically argues  that we do not have a direct measure of full employment or the NAIRU. It is inferred from the behavior of wages and prices. With this imprecision, the Fed should not tighten before there are indications from market-based wages and prices that the US economy is pressing against capacity limits. The NAIRU has fluctuated between around 6.5% and 4.5% over the last 50 years, but is difficult to determine ex ante and there is no reason to guess. (The counterargument is that inflation is a lagging indicator so by the time we see it, it is too late for a soft landing, but that is not the argument she is likely to make).

Productivity growth
Productivity growth has been dropping since the mid 1990s.

In fact where we are now is pretty much in line with the trend that began in 2004, and if anything the risk is that we are falling below. Most cyclical productivity gains come during the early recovery period and that was in 2009-10.

Labor force participation
The US has averaged 195k jobs for the last 40 months, so it is harder to make the case that workers are discouraged by the absence of jobs. The employment to population ratio of older works is higher than before the crisis, unlike that of so-called prime aged workers (Figure 2).

In the past we have seen labor force gains towards the end of recoveries. It is hard to pin down what drives the gains but the pickup is not so fast even in the initial stages of strong recoveries when output and employment gains are rapid. 

Figure 3 shows the participation rates of men aged 25-54 years. There has been a downward trend the last 50 years, often exacerbated by recession and with modest subsequent rebound in participation. (we use male participation rates because the influx of women into the labor force in the 1970s and 1980s would make it very hard to see the cyclical behavior.)
There is a difference between the argument that strong growth will encourages workers to rejoin the labor force and keep a lid on wages and prices and the more pessimistic argument that higher wages for everyone are needed to increase participation rates by one or two percent. The latter leads to higher unit labor costs in general, the former to lower.


*  *  *

Then again, you could just listen to Goldman...

With opinions mixed as to whether or not Jackson Hole will be the forum for Yellen to say something new, many are trying to figure out if it is a buy the rumor and then buy more after the fact event, a buy the rumor sell the fact event, or a do nothing with the rumors and then buy the fact if the USD is actually rallying after the fact event.

Got it?

*  *  *

As The WSJ reports, it's going to be hard for the Fed to justify more dovishness in light of their own exuberant slack-less data...

But we are sure they will find a way

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Hohum's picture

How is Yellen going to improve the cash flow in the Bakken?

knukles's picture

Go full bearish claiming great economy, raise rates.
Followed by continued deterioration in global economy, necessitates future mega-easing (If that is possible, as in mega, etc.) and mass confusion
Go full dovish...
Followed by more of the same easy money and mass confusion.
Whichever way it goes on the Calvary Hill in Jackson, it will not produce wine from water, feasts form crumbs
As the global malaise is not responsive to monetary policy (to wit, present circumstances) because present malaise in not a function of monetary policies.

Getchur income while you can...
Anchored by real asset

We live in a stasis world of 19th standard deviation events as if proscribed in a leptokurtic mini norm far in the left hand tail of reality.
Get used to it

No wonder people speak in terms of the present as a disaster of Biblical proportions.

espirit's picture

'Dovishness' is a WTF moment when the wheels are falling off the eCONomy?

Lamestream policy is just a smokescreen to cover the last bits being shuffled around by the oligarchy.

Implosion is just around the next bend.

asteroids's picture

Or, she could admit that the FED has no fucking clue what its doing and just because the last 6 years have been an epic failure for Main Street its been a stellar sucess for Wall Street. On that basis, the FED will continue with what works. More money printing to satisfy its dual mandate of low prices and full employment of Wall Street.

order66's picture

Why, go full Dovetard of course.

rubiconsolutions's picture

Is it dovish or doucheish? When it comes to Yellen....sorry about the visual. Ecchhh.

HardlyZero's picture

She will put out like the Queen of Babylon.

Give it away now... Red Hot Chili Peppers


I can't tell, if I'm a king pin or a pauper

Greedy little people in a sea of distress
Keep your more to receive your less
Unimpressed by material excess

X.inf.capt's picture

unless russia invades the ukraine...

then they'll have to raise rates alittle...

to sell all those 'war bonds'...to finance this one...

X.inf.capt's picture

narrative from the hole



q99x2's picture


Yellen's goin up my FAFSA

ParkAveFlasher's picture

Shemp has a tough choice here.  Either do what Mo tells him, or get a knuckle sandwich.  The tension is unbearable.   I hope it lasts.


Fergusen peeps...I hear J-Hole is nice this time of year. 

Cognitive Dissonance's picture

No bears allowed. Only unabashed Bulls.

lasvegaspersona's picture

Everything is fine, the Fed can just print more ( and more and more and more and more and more and more and more and more...and so forth...) money.

hold gold hedge with S&P...even if the currency fails you will want to be able to tell the grand kids you were a billionaire ...right?

knukles's picture

Ah, the olde Zimbabwean strategy.  Most Excellent

NickVegas's picture

"Advocate for a temporary overshoot of the inflation target."

No saving for the slaves. Silly me.


theliberalliberal's picture

we've had nirp policies

we've had zirp polices

next: herp and derp policies

flacon's picture

All the market needs now is Acquired Immune Deficiency Syndrome.

ShrNfr's picture

No matter how dovish she gets, when the Fed flies over, the serfs get shit on.

nosoeawe's picture

dovish, hawkish, just as assine as the whole democrat / republican paradigm. 


the white haired geriatric garden gnome can not raise interest rates. tell me again what the interest payment on 17 trillion looks like?


if anything, they will follow their jack ass EU counterparts and go full retard w/negative interest rates.


why would banks pay interest on worthless paper promises

NotApplicable's picture

"Simple Jack!" LOLed hard.

HUGE_Gamma's picture

Sshh.. don't give her any tips -Bear

DavidC's picture

And all of it complete bollocks....


gmak's picture

Just so long as she knows that you can't do full retard if you want any awards. (Too late says the quiet voice from the shadows).

GooseShtepping Moron's picture

I will go out on a limb here and predict that Yellen will act hawkish, but there's no reason she has to telegraph that fact to the world. She won't say anything to spook the markets, but QE will still end and interest rates will still rise.

I believe Yellen knows that the employment target is BS anyway and that right now it serves mainly as a means to make the Fed into the scapegoat for Congressional and Presidential policy failure. Therefore Yellen will quietly let QE end, quietly let the employment target be reached, and then say to Congress, "I did my job. It's your problem now."

She does not want the economic profession to be maligned for what is essentially a failure of political leadership, and she is right.

Greenskeeper_Carl's picture

The failure of leadership you mention happened 100 years ago when our elected officials created this criminal, unconstitutional institution in the first place. Everything else we have seen was a forgone conclusion after that day.

QQQBall's picture

How did we get here? I mean, Bernank was Man of the Year and idjit of our generation. Greasepan was in a league of his own.

AdvancingTime's picture

Regardless of what you call it the "Federal Reserve Nightmare" or the "Yellen conundrum", the box Ben Bernanke made when he painted both himself and the Federal Reserve in a corner remains. Bernanke has by passing the chairmanship to Yellen escaped from the QE trap but left the rest of us fully in its grasp.

With a policy of loose and cheap money  and an inflation target of just 2% the Federal Reserve  continues to please those gambling that not fighting the Fed guarantees profits. I wish someone would let the Fed know we have already passed their inflation target.

As many Americans are forced to pay higher food, gasoline, and health insurance premiums any thought that inflation is not higher has come from the false illusion brought from lower payments on things like auto loans and mortgages. This is a one off and will not continue. Trouble lurks ahead. More on this subject in the article below.



DirkDiggler11's picture

Why should I really give a flying fuck what she says ? I am out of the equity markets, I don't trade fhe equally rigged FX markets, I'm out of bonds as well effective this week.

My investments continue to be food, ammmo, gold, silver and some mighty fine whiskey. Yellen can announce she is a carpet munchin bull dyke that has been having an affair with Hillary and that they are both going to run for President for all I care.

Trade Guru's picture

How soon we forget that a strong dollar kills U.S servicing of debt no?

For ever tick that thing keeps rising...as does the total outstanding service of the over ballooned Gov Debt.


Not too long ago the Fed was crushing the USD as the only option America had! So what's changed?



Man.....- Strong Dollar / Weak Dollar fuct either way you look at it.





Keltner Channel Surf's picture

Though it's hard to argue with this, the overwhelming notion when viewing such material is that, seven goddamn years into this mess, markets are STILL more interested in arcane Fed media posturing than either actual Fed actions or, more importantly, economic realities on the ground.  

That they don’t see this as a problem, but instead as comprising their main ‘guidance’ function, with only our lovely Congress able to make direct queries, pushes it over the top into hopelessness.  “Don’t do stupid stuff” should be the next Amendment.

BringOnTheAsteroid's picture

If I hear the term Dovish or Hawkish one more fucking time I am going to . . . . . . to . . . . . . . fucking do nothing.

What the hell sort of twisted reality have we found ourselves in when fundamental analysis has long since left the scene and the worlds economics devolves into two words based on the utterances of a numbskull who looked like she died 20 years ago and is given the appearance of life with internal animatronics.

Dovish . . . . . . ooooooooo  . . . . market goes up.

Hawkish . . . . . ahhhhhhhh . . . .  market goes down.

We are at greeds final destination at which point the market will neither go up or down but cease to exist. Try and unwind all those calls and puts then. Your well in the money calls will be sitting there in your CFD account worth thousands upon thousands. Your well out of the money puts will be sitting there in arrears by thousands and thousands. Forever. Markets gone, Finished. Our greed frozen in time as a mantle piece item, a purgatory for everyone who tried to make a quick buck.

Yen Cross's picture

   Figures this article was written by some fucking shill from Citi...

analyzer_66's picture

If the seasonal adjustment fudge factor is +200k jobs per month then....

BringOnTheAsteroid's picture

"There are three ways by which Yellen can express dovishness, but only one that breaks new ground:
i) Full dovish

1) Argue that the natural rate is less than 5 ¼ -  5 ½ %


2) Advocate for a temporary overshoot of the inflation target


3) Emphasize the uncertainty around NAIRU estimates that tightening can wait till there is real evidence of accelerating inflation.


4) Introduce a soft wage target of about 3.5%, consistent with  aspirational 1.5% productivity growth and 2% unit labor cost growth

ii) Semi dovish

1) Make the case that there is no sustained inflation likely without accelerating wage growth and there is little broad evidence for such a pickup, but keep existing inflation and unemployment targets


2) Introduce a new labor market indicator that captures the slack she feels that the unemployment rate misses, but again keep to existing targets

iii) Contingent dovish

1) Forecasting a pickup in productivity and labor force participation that will limit the need for tightening"





What the fuck does any of that mean??????????????????????????????

Quantum Nucleonics's picture

You need not be concerned.  Yellen won't be doing or saying anything to remove the punch bowl this week.  She's a democrat, and a liberal.  There's an election coming and she doesn't want a republican controlled senate. A "recovering" economy is the one part of the Team Obama/Democrat narrative that isn't in complete ashes, and a stock market crash wouldn't exactly help said narrative.

Long equities, Janet is writing you a "free" put.

BringOnTheAsteroid's picture

How can you be sure as there is so much money to be made on the downside. Any fucking second now the rug will be pulled but don't worry, the elite have their puts in place ready for the final wealth extraction.

I am sure US pension fund managers are in cahoots with the elite to keep funnelling hard earnt money, people life savings, into the stock market. When the rug is pulled this time you will witness the culmination of the greatest theft in history.

Ebola will be used as a cover for the collapse. The Fed can say, we tried to do all we can, we had the market at record highs and the recovery well underway, but there's nothing we could do in the end.  

flacon's picture

...and they will say that "if only there was MORE regulation and MORE control - it's the fault of the Free Markets that Capitalism died. Next time we will have a centrally planned economy and this won't happen again."... 

Yep, that's what they will say. 

BringOnTheAsteroid's picture

Anytiime I read or hear the statement "The committee . . . . . views current growth . . . . . . . deems the current rate of employment . . . . . . sees inflation tracking towards . . . . . " I immediately think of communism. "The committee". 

Bossman1967's picture

As I predicted last friday and I batted 100 percent on the markets. I was in the financials business and I will do it again for all. Yellen dances Dow record pumps 300. s&p over 2000 first time gold -50 silver -1.00 . This will continue until they start the war or nov elections. They would like to never stop but the rest of the world is pissed and may just tell us to go f..k our selves. Maybe just maybe We wake up and stop these criminals but wont hold my breath folks

Fast eazy's picture

She has already gone full retard. Why not.

TheRideNeverEnds's picture

Tremendous downside huh?  So what are we talking here, like down 10 or 20 points on the S&P? 

himaroid's picture

Remember, dovish 10 yr yield rises, status quo, yield falls. Biotch will head fake dovish to get bonds sold, then some bullshit reversal later in the day. Good, I need to reload TLT. Thanks, BIOTCH!