How Yellen could 'inadvertently' send a hawkish signal at Jackson Hole

Sam Ro
Managing Editor

Fed Chair Janet Yellen is expected to avoid sending any market-moving signals about monetary policy when she speaks on Friday morning at the Kansas City Fed’s Economic Policy Symposium in Jackson Hole, Wyo. But that won’t prevent traders from parsing every word looking for clues to what the Fed might do next.

The Great Room at the Jackson Lake Lodge, in Grand Teton National Park, north of Jackson Hole, Wyo. (AP Photo/Brennan Linsley)

TD Securities’ Jacqueline Douglas, Michael Hanson, Richard Kelly and Gennadiy Goldberg think Yellen could “inadvertently” send a hawkish signal.

Yellen’s speech, titled “Financial Stability,” comes as inflation readings have been persistently low. Low inflation puts pressure on the Fed to take a dovish stance and keep monetary policy loose. However, with the economy growing and unemployment at very low levels, the Fed has actually taken on a more hawkish stance that has come with interest rate hikes and warnings that the central bank will soon begin to reduce the size of its balance sheet.

Because of this conflict, any and every speech from any Fed official has been watched closely.

The “third mandate”

“The most hawkish approach would be to elevate managing financial stability risks to be roughly on par with the dual mandate objectives,” the TD economists said. (The current dual mandate is to achieve maximum sustainable employment and stable prices.)

TD’s warning isn’t too crazy, as this unofficial “third mandate” of financial stability is something Yellen has been associated with for a long time. In fact, Yellen said this explicitly in 2013 when she accepted President Obama’s nomination to be Fed Chair.

“I pledge to do my utmost to keep that trust and meet the great responsibilities that Congress has entrusted to the Federal Reserve — to promote maximum employment, stable prices, and a strong and stable financial system,” Yellen said (emphasis ours).

“We do not expect Yellen to take that position on Friday — in her post-FOMC press conference in June, she averred that the Fed is ‘not targeting financial conditions,'” TD said.

Whatever she says, Yellen’s speech is sure to spark some discussion and perhaps confusion regardless of her intentions.

“However, we do see a risk that she ends up (inadvertently) lending some credence to the idea that financial stability concerns would be a separate reason, beyond the dual mandate objectives of price stability and maximum employment, for the Fed to continue to normalize policy,” TD added. “If so, markets would take a hawkish message from this, although reaction may be muted as fed funds futures are already skeptical of the Fed’s hiking pace.”

Yellen is scheduled to speak at 10 a.m. EST on Friday, August 25.

Sam Ro is managing editor at Yahoo Finance.

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