Thursday, August 25, 2016

Traders Rightly Anxious in Front of Jackson Hole Symposium

Treasuries traders are treating Jackson Hole like a Payroll event...and more.  Price action is coiling over the last days and giving indication of uncertainty.  We remember that Yellen abstained from going to Jackson Hole last year, possibly not wanting to add to already strong belief that the Symposium was a forum for policy change.  Her going this year has heightened expectations, and possibly correctly, that she might offer additional policy guidance. 

One thing I have found interesting and very helpful in watching the Fed for many years is that when the Fed announces a rather dramatic change in policy intent or a change in the use of tools by which that policy is administered, they often find it helpful to simultaneously change some other aspect of policy.  These dual changes in policy have had a tendency to limit the potential immediate market reaction as economic agents are required to determine the collective impact of the multiple changes rather than a much more simple exercise of figuring out what one change might mean. This situation leaves economic agents studying the situation rather than hitting bids or lifting offers, mitigating the potential for an adverse response.  You might remember the many times where QE operations were initiated, adjusted or terminated and at the same press briefing, an announcement was made concerning a change in monetary policy guidance.

There is a chance, however small, that Chair Yellen takes the opportunity in her speech tomorrow to bring forth news of a likely shift in the policy rate target from ‘fed funds’ to the Overnight Bank Funding Rate (OBFR), considered by many a more robust measure in this changed policy landscape of heightened Fed balance sheet holdings.  The accompanying announcement, meant to be the distraction (or vice versa) could be stronger guidance for a near-term policy firming. 

In any event, and even following a possible modestly strong market reaction, we might expect volatility to drift lower after her speech as that this 'event risk' elapses.   

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