Janet Yellen's J-Hole Speech: Slack Remains, QE Is Over, Rates Could Rise Sooner (Or Later)

Tyler Durden's picture

Simply put, as Citi noted, unless Fed head Janet Yellen goes full-dovish, risk assets face tremendous downside potential.  As ConvergEx's Nick Colas notes, Yellen receives a "B" grade from financial professionals, fewer than half (49%) of those surveyed approve of the job the Federal Reserve is doing. A clear majority (59%) of respondents describe the Fed as being "behind the curve" with respect to interest rates. Despite better-than-expected data whereever one looks in the US (apart from wages and housing), any hint of seni-dovish, or contingent dovish... or heaven forbid hawkish comments and the massive consensus trade that the Yellen Put has an ever-increasing strike price will fall rapidly by the wayside... though Draghi could come in later and save the day. With S&P so close to 2000, we suspect any hint of word 'slack' and algos will run stops and USDJPY will break 104.

Pre-Yellen: S&P Futs 1986, 10Y 2.407%, JPY 103.77, Gold $1278, Oil $93.35

  • *YELLEN: LABOR MARKET HASN'T FULLY RECOVERED EVEN AMID JOB GAINS
  • *YELLEN SAYS THERE'S `NO SIMPLE RECIPE' FOR APPROPRIATE POLICY
  • *YELLEN: FOMC SHIFTING TO QUESTIONS ON LEVEL OF JOB-MARKET SLACK
  • *YELLEN SAYS GAUGING LABOR-MKT SLACK NEEDS TO BE `MORE NUANCED'
  • *YELLEN REITERATES ASSET BUYING TO BE COMPLETED IN OCTOBER
  • *YELLEN SAYS ASSESSMENT OF SLACK DEPENDS ON RANGE OF VARIABLES
  • *YELLEN SAYS FASTER PROGRESS ON GOALS MAY BRING RATE RISE SOONER
  • *YELLEN SAYS SLOWER PROGRESS ON GOALS MAY DELAY RATE INCREASE
  • *YELLEN COMMENTS AT FED CONFERENCE IN JACKSON HOLE, WYOMING
  • *YELLEN SAYS FOMC SEES SIGNIFICANT UNDER-USE OF LABOR RESOURCES

 

We are unsure if there is a live feed (due to start at 10amET) - click image for link to live Feed from Bloomberg if there is one.

 

The full Yellen wordcloud:

Full Statement (link):

 

 

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BACKGROUND...

As Deutsche's Jim Reid notes,

Chair to provide us with an updated assessment on the infamous ‘Yellen dashboard’ in evaluating the ongoing labour market slack and how they have yet to normalise relative to 2002-2007 levels. Some of these alternative measures she monitors include duration of unemployment, quit rate in JOLTS data, labour force participation etc. Any sound bite that touches on the debate of cyclical versus structural drivers of labour force participation will also be closely followed. Unlike some of the previous Jackson Hole symposiums, this is likely not one that will serve as a precursor of any monetary policy changes but the tone of Yellen's speech may still have a market impact and set the mood for busier times ahead in September. Given markets are seemingly expecting nothing but another dovish display from Yellen the risk is perhaps skewed to the other side.

And ConvergEx shows even the pros are in doubt...

  • ConvergEx Group Survey Finds Less Than Half of Respondents Approve of Job the Fed is Doing
  • Two-Thirds of Respondents Say Central Bank Has Too Much Influence On Markets
  • Financial Professionals Name Paul Volcker As Best Federal Reserve Chairman Of All Time

"The financial industry likes Janet Yellen but believes she leads a central bank that is overexposed and behind the curve," said Nicholas Colas, ConvergEx Group chief market strategist. "There's tangible fear among investment professionals about the unwinding of Quantitative Easing and the painful increases in rates that will follow. Our survey shows that Ms. Yellen is seen as a strong leader, and investors don't want to scrap the structure of the Fed, but there is real concern about what happens next."

 

As we noted previously, expectations are extremely high...

‘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.

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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.