Climbing to the Mountaintop in the Search for Monetary Meaning

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Climbing to the Mountaintop

Vincent Reinhart

Vincent Reinhart - Chief Economist & Macro Strategist

The annual economic symposium of the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming, is Woodstock for central bankers, except without the sex, drugs, or rock-n-roll. Despite the seasonal buildup in the media, the show generated few headlines. This was likely the aim of the two lead players. Federal Reserve Chair Janet Yellen and European Central Bank President Mario Draghi reflected on changes in financial regulation, both domestically and in terms of international coordination, since the Great Financial Crisis. They saw the sunnier side of tighter rules, increased scrutiny, and thicker capital buffers for financial intermediaries—a safer and more resilient financial system.

Nary a word appeared in their prepared remarks about the near-term preoccupations of investors.

For Yellen, does the mention of "relatively soon" in the minutes signal the announcement at the September FOMC meeting of the start of the slowing of reinvestments of maturing and prepaying securities? Should a 25-basis-point firming of the funds rate at the December meeting get more probability weight than the 40 percent currently evident in fed funds futures? At Standish, we think the answer to both questions is "yes" but the former is more certain than the latter.

After all, Fed officials have worked hard in trying to convince investors that trimming the central bank balance sheet will be incremental, gradual, and sensitive to economic and financial conditions. Having pointed to September for so long, we think it would take a dramatic adverse turn in events to convince them to leave market participants waiting at the altar. As for a hike in December, we, as are Fed officials, still awaiting the arrival of higher inflation.

For Draghi, at what point will the ECB slow their new purchases? We think soon, next month, but that ECB policy will remain accommodative for a long time to come.

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