More than ever, the time is right for Janet Yellen to preserve her options.
That’s why when the Federal Reserve chairwoman speaks Friday in Jackson Hole, Wyo., any description she offers of the U.S. economy will probably be crafted to keep an interest-rate rise on the table for the central bank’s policy meeting next month — without committing it to act.
Either way, September will be important for many of the world’s central bankers gathering at their annual mountain retreat this week, as near-zero or negative policy rates struggle to lift global growth. The Bank of Japan is due to conclude a policy review and the European Central Bank will likely gauge the impact of the U.K.’s vote to leave the European Union and whether any stimulus response is necessary.
The formal topic of Yellen’s speech is the “monetary policy toolkit,” and the conference itself, hosted by the Federal Reserve Bank of Kansas City Fed starting Thursday and concluding Saturday, is “Designing Resilient Monetary Policy Frameworks for the Future.”
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Both imply an academic focus on the challenges confronting policy makers that have prompted a rethink of conventional wisdom about the relationships between unemployment, inflation and interest rates, as well as the best tools to tackle the next recession.
But the conference has also sometimes been the chosen venue to deliver important policy signals. Ben Bernanke, as Fed chairman, used speeches in 2010 and 2012 to lay out the case for more asset purchases.
Yellen, who didn’t attend last year, has shown less interest in telegraphing changes with her remarks at Jackson Hole. With economic growth picking up and the job market near full employment, she may want to use her first public comments since delivering congressional testimony in June to reinforce her view that rates should move up over time.
“I expect that she would want to preserve the option of moving in September without giving any very definite signal that they are ready to do it,” said Michael Woodford, a Columbia University economist whose 2012 paper at Jackson Hole helped to persuade the Fed to use more explicit forward guidance on interest rates.
Investors put the probability of a rate increase this year at just over 50 percent, according to the prices of federal funds futures contracts.
Fed officials are reviewing their assumptions about the level of interest rates consistent with neither spurring or braking the economy, known as the neutral rate, as productivity growth has slowed and unemployment has declined without lifting price pressures.
While Yellen might highlight the low neutral rate as an important longer-term factor, that won’t take a rate hike off the table for 2016.