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Yellen To Focus On Labor Market At Jackson Hole; Dovish Talk May Lift Gold

By Debbie Carlson of Kitco News
Wednesday August 20, 2014 12:25 PM

(Kitco News) - Federal Reserve Chair Janet Yellen is slated to speak Friday at the annual Jackson Hole Economic Symposium conference, and economists say she is likely to reiterate her oft-stated dovish views that there is too much slack in the U.S. labor markets.

Considering market liquidity is currently thin, there is a chance of some price movement in financial and commodity markets, even if nothing new is said, these economists add. For gold, dovish talk may underpin the metal Friday, commodity analysts said.

The conference takes place Thursday through Saturday in Jackson Hole, Wyoming, hosted by the Kansas City Federal Reserve since 1978. In recent years the meeting has taken on heightened importance as financial markets look for speakers to shed light on their outlook for the economy.

Yellen speaks at 10 a.m. EDT Friday and European Central Bank President Mario Draghi addresses the gathering at 2 p.m. EDT. This will be her first speech as Fed chair.

This year’s topic is “re-evaluating labor market dynamics,” and Yellen’s speech is simply titled “Labor Markets.”

Many economists said they don’t expect much deviation from her past comments about her concern regarding employment conditions in the U.S., including underemployment and sluggish wage growth.

“She’s hasn’t changed her tune yet, so I don’t see why she would do that this time. But it is August, and it is a Friday, so you may never know…. She still views that there might be labor market slack and (is) looking at the broader measures, rather than the actual underlying employment rate. We expect her to be consistent with that,” said Michael Wallace, global market strategist, Action Economics.

Thomas Costerg, U.S. economist at Standard Chartered, agreed and said it’s unlikely this year’s conference will offer any signs of near-term monetary-policy action.

“This symposium is unlikely to resemble August 2012’s, when Chairman (Ben) Bernanke dropped strong hints about a third round of quantitative easing, launched the following month,” Costerg said.

There’s no reason for a change in policy at this time, he said. While payroll growth is strong, job quality is mixed and the number of people working part-time remains high, as does long-term unemployment. Costerg added sluggish wage growth is now the key labor-market metric, which encompasses all of these concerns.

Other factors such as low personal consumption, mixed housing data and moderating inflation suggest the Fed can keep the status quo on monetary policy, he said.

“There is no pressing need to signal an earlier rate hike. The Fed is probably satisfied with current market expectations of a hike in June 2015 (which is) also our central scenario,” Costerg said.

Rob Haworth, senior investment strategist, U.S. Bank Wealth Management, said the Fed might give hints of how the central bank is seeing and interpreting data, rather than giving indications of new or different policy direction.

 “That’s the extent of what we’ll see in Jackson Hole. We expect a bigger market reaction, I believe, at the September meeting as they really get to winding down QE and the Fed starts to manage the market expectations, relative to their own expectations, (and) relative to Fed Funds rate increases,” he said.

Costerg also said outside the official agenda, debate about the Fed’s exit strategy will likely occur. He said as the Fed gets ready to exit QE, there remains some discussion about the route to policy normalization. Comments in the Federal Open Market Committee meeting minutes are anonymous, so the Jackson Hole confab could put some “faces” to the differing views, he said.

“Of particular interest is what the ‘core’ FOMC thinks … and whether the dissenters are coming closer to the core’s view... This being said, not all FOMC members participate in Jackson Hole; the most influential FOMC members do, however,” he said.

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Market Reactions Possible

Wallace said given the thin trading conditions there could be some market reaction to Yellen’s comments, even if they are exactly what she has said previously.

“The few skeletons that are out there are happy to lean whichever way the wind blows. You have the easier policy on the table with the EU, and tighter policy on the brink in the U.S. That could change, but it’s hard to fight that at the moment… She’s not going to want to startle the markets at this stage. And certainly the biggest risk if they (Yellen and Draghi) do say something (startling) and (bond) yields move back up, they simply will undermine the progress to date. It’s the same catch-22 in European markets,” he said.

Jim Steel, analyst at HSBC, said with geopolitical events subsiding, gold investors will likely focus on the Jackson Hole discussions.

“Gold is historically highly sensitive to monetary policy comments, as seen from its price reaction to previous Chairman Ben Bernanke’s speeches... Subsequently, perceivably dovish policy comments by Ms. Yellen at the Jackson Hole meeting would provide a boost for gold prices, while perceivably hawkish policy comments would drag bullion down, ” he said.

Haworth said given the likelihood of monetary policy normalization on the horizon, his longer-term view on gold is bearish.

“It’s hard for me to be really bullish on gold. We’re seeing some support here, but it’s tough for me to say gold should be where it is because of changing Fed policy and better economic growth. I think the hardest part for any speculator in gold is going to be when you’re getting toward positive real interest rates, which will make gold a more-expensive holding relative to bonds, which may pay you real rates of interest at some point,” Haworth said.

By Debbie Carlson of Kitco News; dcarlson@kitco.com
Follow me on Twitter @dcarlsonkitco



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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