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All Eyes on Yellen's Jackson Hole Speech

August 22, 2014 8:24 AM EDT

Markets are keenly focused on Fed Chair Janet Yellen's 10AM ET speech today at Jackson Hole, where many expect her to maintain her dovish tone. The topic of the Symposium is "Re-Evaluating Labor Market Dynamics" and the title of Yellen's speech is just "Labor Markets."

Economists at Nomura believe that Yellen will not want to use this venue to signal a material change in monetary policy. That said, the topic 'labor markets' is very relevant to the outlook for policy. They suspect that she will stress there is still plenty of evidence of slack in labor markets, while acknowledging the improvement in labor markets and FOMC policy is data dependent.

They expect Yellen to reiterate points she has made in the past about labor markets. In particular she is likely to stress that there is ample evidence that labor continues to be underutilized. Yellen is also likely to stress that the relatively slow growth of wages is a sign that considerable slack remains in labor markets. That said, with labor market's improving more rapidly than the FOMC expected she is also likely to acknowledge this out-performance. Yellen may also acknowledge that a reasonable assessment of the state of labor markets is now less black and white than it has been for most of the past five years.

The economists also noted that in recent months Yellen and other FOMC members have been stressing that their "forward guidance" is data dependent. In her recent semi-annual testimony to Congress on monetary policy, Chair Yellen stressed the FOMC's key judgment that “the current target range for the federal funds rate likely will be appropriate for a considerable period after the asset purchase program ends “ was just an expectation that was based on their current assessment of a broad range of factors. They suspect that Yellen will reiterate this theme in her Jackson Hole speech. "Of course stressing that the FOMC interest rate decisions are "data dependent" implies that the FOMC's current expectation that “lift-off” is still a "considerable" way off is subject to change, either way," they said.

Nomura's "Bottom line" is as follows:

"We do not believe that Yellen intends to use her speech at Jackson Hole to signal a material change in the direction of policy.

However, it may generate some volatility. We expect her to reiterate some of the points she has made before about labor markets. We also expect her to note the recent improvement in labor market performance, and she may acknowledge, and/or discuss, some of the controversies regarding “Labor Market Dynamics” that the conference will, no doubt, address. Finally, we expect her to reiterate her recent discussion of economic uncertainty and its connection to the outlook for interest rates.

This is a rich mix. If Chair Yellen strongly reiterates her judgment that there still is a lot of slack in labor markets, market participants may infer that the FOMC is further away from tightening policy than they thought. On the other hand, if she seems to emphasize the improvements we have seen in some aspect of labor market performance, and that the forward guidance is "data dependent," market participants may draw the opposite conclusion. In this sense, Chair Yellen‟s speech may prove to be a bit if a Rorschach test for market participants.

Of course the re-emergence of geo-political risk in recent days could, if it persists and intensifies, affect Chair Yellen's priorities for this speech. We think that is not likely, but at this point we can‟t rule it out."



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