Fed Speak Roller Coaster

You may have woken Saturday morning and seen a gold and silver price not hugely changed despite the much anticipated Jackson Hole speech from US Fed Chair Janet Yellen.  If you looked at the chart for the night however you’d have seen the huge rollercoaster the prices rode.  That ride is interesting to break down on the flow of information.


When the speech transcript was first released it looked a bit hawkish (i.e. tighter monetary policy) as she seemed to talk up the possibility of rate hikes soon:

"…in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months."

On that initial reading you can see above the price started falling.  But then it seems they got to the real juicy bit of the speech, buried much deeper in the transcript and the price bolted vertically up.  This is what she said:

“…future policymakers might choose to consider some additional tools that have been employed by other central banks, though adding them to our toolkit would require a very careful weighing of costs and benefits and, in some cases, could require legislation. For example, future policymakers may wish to explore the possibility of purchasing a broader range of assets. Beyond that, some observers have suggested raising the FOMC's 2 percent inflation objective or implementing policy through alternative monetary policy frameworks, such as price-level or nominal GDP targeting.”

This was a very dovish statement as it not only anticipates reintroducing QE (money printing) but extending it to buying corporate bonds and shares (as done in Japan, EU, etc).  It also contemplates raising inflation targets and price level targeting which sees injecting money until you get the GDP you want because, you know, that has worked so marvellously in Japan….

But then to quell these dovish market expectations, out comes fellow Fed director Stan Fischer in a post speech interview where he said  "Yellen's comments are consistent with a possible September hike." and indeed said 2 were possible with the second in December…. and down went the price again almost back to where it started.  Such is this market based on Fed speak not fundamentals.

There is plenty of speculation now that she may well raise rates soon, trigger what seems like an inevitable crash, and then unleash this now vocalised new stimulus.  We are not so convinced about September as it is just before the US election and a crash could well hand the presidency to Trump, something they will be desperate to avoid.  Wall St bond king Bill Gross summarised this beautifully:

“She is opening the door to creating even greater asset bubbles as have the BOJ and ECB and SNB by purchasing corporate bonds and stocks….This is not capitalism. This is providing a walker or a wheelchair for an ailing economy. It may never walk normally again if monetary policy continues in this direction.”

All eyes are now on Friday night’s NFP employment figures with a strong print being seen as significantly raising the odds of a September, or at least December hike.  Strap yourselves in for the ride.