• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Economic Data

Here's What to Watch for at the Jackson Hole Economic Summit

The annual symposium will take place this coming Thursday through Saturday.
By TOM GRAFF
Aug 18, 2018 Updated Aug 20, 2018 | 03:03 PM EDT
Stocks quotes in this article: IEI

Every year we all look forward to certain events to close out the summer. Labor Day cookouts. Start of the NFL season. Back to school shopping. But if you are an economics nerd like me, you look forward to the Kansas City Fed's annual Economic Symposium held in Jackson Hole, Wyoming.
 
For the most part, Jackson Hole is a premier academic conference, filled with panel discussions and paper presentations. In some cases however, these seemingly ivory tower conversations have had major influence on central bank policy. Michael Woodford's 2012 presentation was a watershed in post-crisis central banking. People who understood quickly how influential that would be would have made a lot of money.
 
The conference also usually attracts some major speeches from central bankers themselves. Ben Bernanke famously made the case for QE2 in 2010, turning a hotly debated possibility into a certainty, and later made similar cases for QE3. Janet Yellen and Mario Draghi have also used the occasion to make the case for major policy moves.
 
Unfortunately, the agenda and speaker list are not published until the week of the conference. We know Fed Chair Jerome Powell will be speaking on Friday on "Monetary Policy in a Changing Economy" and that obviously has the potential for fireworks. Here is what I will be looking for in that speech as well as a few other big picture issues that could come up during the conference.

Steady as she goes

I've said before that Powell probably feels like doing a victory lap. Inflation is right at 2%, unemployment keeps falling, financial markets are strong but not ebullient. What more could a central banker ask for? I'm sure he will begin his speech with a little basking in the sun over how its been going.
 
However I expect him to come with a message: steady as she goes. The market seems convinced that the Fed actually only has 2 maybe 3 hikes left in it before an extended pause. July 2019 fed funds futures contracts suggest the Fed's target rate will be 2.56% approximately a year from now, which is almost 3 hikes from today. The contract structure then goes dead flat from there, suggesting the Fed neither hikes nor cuts as far as the eye can see.
 
It seems the market thinks that once the Fed gets to its "neutral" rate it will stop hiking. I don't think that's how Powell & co. are actually thinking. The so-called neutral rate is a crucially important concept but totally observable. It is whatever rate results in monetary policy being neither accomodative nor restrictive. We don't know what that rate is until we observe whether any given rate is resulting in a stronger or weaker economy. In other words, the Fed might want to be at neutral, but it also doesn't know what neutral is. All it can do is keep hiking until it seems the economy is slowing.
 
Powell probably wants the market to be a little less sure of itself, and will thus likely strike a hawkish tone. While he will leave himself enough wiggle room to either accelerate or decelerate rate hikes in the future, I think he wants the market to be prepared for more hikes than it is currently pricing. How will he do this? I'm not sure, but the message will be more or less that as long as unemployment is falling the Fed is probably hiking.

Trades around a hawkish Fed

 I took half of my long USD position off this week after we got to an overbought position, but I'll look to reload before Friday. A hawkish Fed is USD positive.
 
I also like being short 5-year Treasuries. I'm pairing that with a long long-term bond position, but if you want to trade Friday specifically, I'd be outright short intermediate-term bonds. There aren't great leveraged ETFs that fit this area, but there are options on iShares 3-7 Year Treasury Bond ETF ( IEI) . I'm using futures to express this trade.

What could stand in Powell's way?

Interestingly, the very things that could stop the Fed from continuing to hike well into 2020 are probably the kinds of things that will get heavy discussion during the rest of the conference. Space does not permit a full treatment of all these issues, but for those that want to follow the conference more in-depth here are some things to watch for. Again, the speaker list is not known, so these are just some items I expect will get play during the conference.

Declining term premium, cyclical or secular?

The term premium is what investors demand in yield to own longer-term bonds irrespective of their forward view of interest rates. I.e., if the Fed were sitting at a 2% rate target and everyone expected that to stay the same for a long time, you might still demand a little more to own a 10-year bond vs. a 2-year bond just for the uncertainty. Whatever that amount, that's called the term premium. The term premium (which has to be estimated and therefore you see various figures claiming to be right) is currently either near zero or maybe even slightly negative. This is important because if it persists at about zero, there's no reason to expect interest rates to rise much at all. If the near zero term premium is merely temporary (perhaps because of QE programs), then there is much more room for rates to rise.
 
My sense is that the term premium is so low because inflation expectations are much more stable and the Fed is much more transparent. Hence I don't need as much premium to buy long bonds. And therefore long bonds are a pretty good bet.

Is the Phillips Curve dead?

This is hotly debated but a central concept for the Fed. The Phillips Curve is the idea that as unemployment declines inflation rises. The relationship is logical, but has been hard to find in the data during the last 30 years or so. The idea that we could get a Phillips-style effect is a central reason why the Fed is likely to keep hiking as long as unemployment is falling. It may be that the Phillips curve is real, but not relevant unless unemployment gets very low.

What about a curve inversion?

Some Fed officials have expressed concern that a curve inversion is a sign that the Fed has hiked too far. This could get discussion on its own or be wrapped up in the conversation about the term premium. Afterall, if the term premium has fallen, then a curve inversion isn't quite as meaningful as it used to be. Or so the argument goes. I personally think that a flatter curve means that money is getting tighter. I'll concede that money isn't automatically tight at any given level, but I think we ignore the yield curve at out peril. This time isn't different.

What will we do in the next recession?

I definitely expect some discussion of what central banks can do when we hit the zero bound next. This isn't immediately relevant for people trading today, but is hugely important to understand for the next time the economy slows. Will we do QE again? Will we try negative rates? My bet on both is "no." Various ideas have been floated, and this could be a moment similar to Woodford in 2012, where a proposal made at Jackson Hole becomes the baseline for debate going forward.
 
-- This article was originally published on Aug. 18
Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication Graff was ong USDU, short 5-year Treasury futures, long Long Bond and Ultra Long Bond futures.

TAGS: Investing | U.S. Equity | Economic Data | Economy | Markets | Stocks

More from Economic Data

FS Insight Weekly Roadmap: Market Response to Hawkish Fed Is an Overreaction

Tom Lee and the FSI Team
Sep 23, 2023 9:10 AM EDT

Here's why we believe 'higher for longer DUE to higher GDP' has a more dovish tone, and remain constructive for the rest of the year.

Tom Lee: 3 Reasons the Post-Fed Market Decline Is an Overreaction

Tom Lee and the FSI Team
Sep 22, 2023 8:37 AM EDT

We view the magnitude of the equity drop and commensurate surge in yields disproportionate to the FOMC rate decision and press conference.

Doug Kass: Risk Happens Fast. This Is All About to Get Real

Doug Kass
Sep 21, 2023 2:30 PM EDT

Caution and stock market congestion may lie ahead as interest rates stay higher for longer, while the stock market decline has now assumed a global character. Plus, more lessons from Howard Marks.

Powell's Terrible Swift Sword, Fed Fallout, What Scared Investors, Key Takeaways

Stephen Guilfoyle
Sep 21, 2023 7:29 AM EDT

The Fed Chair did not sound as sure of himself or the committee as has in the past. He seemed as uncertain about the future of the economy as are the rest of us, which is a negative.

Tom Lee: Here's Why We See a Favorable Setup Into Wednesday's Fed Decision

Tom Lee and the FSI Team
Sep 20, 2023 9:30 AM EDT

Markets are apprehensive into the September FOMC. But we think the risk/reward is actually somewhat positive into this meeting. Stay with Technology, Energy and Industrials.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 12:20 PM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    Trading in Multiple Time Frames
  • 10:24 AM EDT BRUCE KAMICH

    This Could Get Messy

    A number of key stocks are getting close to import...
  • 01:41 PM EDT CHRIS VERSACE

    Latest AAP Podcast With Helene Meisler!

    Listen in as the Action Alerts PLUS podcast talks ...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login