Will Yellen rattle markets from Jackson Hole?

August 19, 2014, 5:49 PM UTC
Photo by Bloomberg—Getty Images

It’s the party of the summer, if you’re into interest rates and macroprudential regulations.

Each year The Federal Reserve Bank of Kansas City sponsors a symposium in Grand Teton National Park near Jackson Hole, Wyoming, where some of the world’s most important central banker, academics and business leaders from around the world convene on a small resort town near the border of Wyoming.

First chosen in 1982 for the for its excellent trout fishing (in order to convince then-Fed-Chair and avid fisherman Paul Volcker to attend), the Jackson Hole symposium has sinced developed a reputation for a place where groundbreaking economic papers are introduced and where market-moving public policy is announced. It was at Jackson Hole, for instance, that Ben Bernanke hinted at the implementation of the successive rounds of quantitative easing in 2010 and 2012, respectively.

So market-watchers will be paying close attention to the gathering this year and to Janet Yellen’s speech, planned for Thursday. Though the theme of the symposium of “Re-evaluating Labor Market Dynamics,” the stock market will clearly be focused on what, if anything, can be gleaned about the future path of interest rates from Yellen’s speech.

The chosen theme of the event should give market watchers hope that hints will be sent their way, as the Fed has made it clear that it’s committed to keep rates at zero until the labor market improves. What Janet Yellen and company have been less explicit about is what exactly constitutes a strong enough labor market to warrant raising interest rates.

If you look simply at the unemployment rate and inflation, it looks like the economy is heading where the Fed wants it to be, and fast.

US 12-Month Trimmed Mean PCE Inflation Rate Chart

US 12-Month Trimmed Mean PCE

This dynamic has lead Fed officials like Dallas Federal Reserve Bank President Richard Fisher to argue that the Fed can and should raise rates as early as the beginning of 2015. Meanwhile, as Morgan Stanely economist Vincent Reinhardt points out in a research note to clients Tuesday morning, the Fed has yet to publicly amend it’s game plan for how it actually will begin to normalize rates, and when it will begin to shrink a balance sheet that at nearly $4.5 trillion back down to a more normal $1 trillion, if it plans to do so at all. Reinhardt explains that back in 2011, the Fed had a roadmap, but that plan is no longer applicable because the Fed has changed its approach to stimulus by making it more dependent on economic conditions on the ground than it had been doing before that time.

So there’s a chance that Yellen might hint at the Fed’s approach to normalizing conditions, but mostly the question comes down to — what does Yellen consider a healthy labor market? Inflation has been below the Fed’s target for more than two straight years, and without any signs of inflation growing consistently, it will be all eyes on the labor market. And Yellen’s most recent public comments on the subject point strongly to the idea that she’s in no rush to raise rates. In July during her testimony before Congress, Yellen talked of “significant slack” in the labor market that was visible in low wages, a stagnant labor-force participation rate, and sluggish turnover in the job market.

And looking at these data, there’s not been strong evidence that would convince Yellen the labor market is improving significantly enough to think about raising rates soon. While a higher rate of workers are starting new jobs and quitting than during the depths of the recession, those numbers remain below normal, as does the labor-force participation rate. And perhaps most importantly, real wage growth continues to be nonexistent:

US Real Average Hourly Earnings Chart

So while the markets will be on the lookout for big news coming from Yellen on Thursday, there’s little reason to suspect she’ll change course any time soon.

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