Many observers had speculated that Federal Reserve Chair Janet Yellen would use her speech at the annual Jackson Hole conference on 26 August to float trial balloons on two key questions: the near-term path for the normalization of interest rates, and the Fed’s longer-run inflation-targeting framework. In the event, Yellen’s prepared remarks did neither.
With regard to the path for rates – the “will they hike in September or December question” – she chose not to use the language included in the minutes of the July Fed meeting, which states that several members of the Federal Open Markets Committee (FOMC) thought it would be appropriate for the Fed to hike “soon.” Instead, she simply said, “ … the case for a rate hike has strengthened in recent months.” Nonetheless, the Wall Street Journal and other media focused on this language, helping to send U.S. stocks down and bond yields up. PIMCO anticipates a gradual increase in rates in coming years, consistent with our New Neutral thesis – which the Fed seems to agree with – of a lower equilibrium policy rate than in the past.
As to rethinking the inflation-targeting framework – which could include a shift to price level targeting, nominal GDP targeting, or even a higher inflation target – she said none of these is under active consideration but that they are worthy of further research.
I’m sure the Jackson Hole setting is lovely for this annual conference, but the Chair did not want to make any real news, and she succeeded.