Market looks for signs of easing in FOMC minutes, Jackson Hole speeches

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By the end of the week, the municipal bond market should have a better idea of what Federal Reserve officials are thinking.

In addition to the release of the minutes from the July Federal Open Market Committee meeting, many Fed officials are expected to speak at the Federal Reserve Bank of Kansas City’s Jackson Hole symposium.

“I think we have arrived at a point now where it’s no longer a debate about whether there will be additional easing/stimulus but more about how much and the timing,” according to Steven Oh, PineBridge's global head of credit and fixed income.

While the minutes will be of interest, the Thursday to Saturday meeting in Jackson Hole “is the main monetary policy event of the week,” said Silvia Dall’Angelo, senior economist at Hermes Investment Management.

While the title, “Challenges for Monetary Policy,” relates to the Fed’s year-long review of monetary policy strategy and tools, “the theme is particularly apt given that the Fed currently has less than half the policy-rate space to respond to downturns than in the past, at a time when a well-known recession indicator is flashing red (last week, US 10-year bond yields fell below two-year yields for the first time since 2007),” she said.

Although speakers usually take a longer term view at the conference, “it has also acted as a forum for central bankers to signal short-term policy changes.”

What to expect from Fed Chair Jerome Powell when he addresses the conference Friday? He’ll “probably suggest that the Fed stands ready to provide additional easing in coming months,” Dall’Angelo said.

As for the minutes, she pointed out Powell “tried to frame” the 25 basis point cut “as a mid-cycle adjustment rather than the start of an outright easing cycle. The minutes will shed light on whether, and to what extent, FOMC members share this view.”

Fed watchers are likely to “scrutinize” the notes of the discussion for talk of “the conditions that would likely lead to additional easing. In particular, views about the impact of global developments on the U.S. economy, trade tensions and the inflation outlook will be in focus."

The minutes will yield "little," other than "the extent, if any, to which the FOMC believes external factors (e.g. trade wars or weakness in foreign economies) may impact the domestic US economy,” said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management. Powell "will have no shortage of topics to potentially address."

“To be sure, the chairman’s speech on Friday will be the pivotal point for markets this week," Chicago-based Larson said. "Following his July press conference, where Chair Powell suggested the FOMC’s policy action was a mid-cycle adjustment, markets will likely seek clarity around the Fed’s willingness to support its mandate beyond an insurance cut in response to pressures around the globe."

The markets are expecting 75 basis points of cuts this year.

In a Tweet Monday morning, President Trump said the Fed should cut rates “at least 100 basis points” and add “some quantitative easing as well” in a “fairly short period” to boost the U.S. and global economy. He said “despite the horrendous lack of vision by Jay Powell and the Fed” the U.S. economy “is very strong.”

"I think this issue remains front and center for Friday and equity markets will like a dovish and supportive Fed outlook," Larson added. "The key will be on challenges, not limitations."

"Beyond that, wishful thinking may hope the chairman acknowledges the recent brief inversion of the U.S. yield curve," he said, "and comments on the historical efficacy of the signal in the context of the current rate environment, the impact, if any, that negative yielding policy actions by other central banks impact U.S. policy, and whether a prolonged trade and potential currency war limit the Fed’s ability to implement effective policy.”

Last week, the Treasury Department said it would again see if the market would buy 50-year or 100-year bonds, an idea that was previously considered then rejected, based on lack of demand.

“With yields having moved down to record lows on the 30 year, the timing of this inquiry is understandable, according to the Mitchell Market Report. “It could also be coming as the White House attempts to take the shape of the yield curve into its own hands amid the festering frustration with Powell and the FOMC at 1600 Pennsylvania Avenue.”

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