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What to expect from Janet Yellen's Jackson Hole speech

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The annual gathering of financial power brokers in Jackson Hole, Wyoming, always makes news, often signaling turning points in monetary policy that affect consumers, businesses and investors. 

The question is just how much Federal Reserve Chair Janet Yellen, who is scheduled to speak at the conclave Friday morning, is prepared to reveal. Her recent public appearances underscore a determination to offer reassurances that the U.S. economy remains on track, while preserving the Fed’s ability to correct course if the recovery bogs down. 

Most Fed watchers expect Yellen, who skipped the meeting in 2015, to continue grooming financial markets for a possible interest rate hike by year-end. At the same time, she is likely to highlight the lingering uncertainties around economic growth, which has slowed this year, and inflation, which remains well below the Fed’s 2 percent target. 

Many forecasters predict that the next rate increase will come in December, but investors are less convinced. So stocks could react negatively if Yellen’s talk at the event, which is sponsored by the Kansas City Fed, suggests a hike could come sooner or if she firms up expectations for a December move. 

More likely is that Yellen offers fairly general insights into her thinking on long-term concerns, including how to restore central banks’ firepower to respond to future economic downturns.

“Janet Yellen will not want to preempt the views of the rest of the Federal Open Market Committee, which meets in mid-September,” said Andrew Kenningham, senior global economist at Capital Economics, in a research note, referring to the Fed’s rate-setting panel. 

Yellen may also be reluctant to make any firm pronouncements on the state of the economy before the U.S. Labor Department’s latest monthly readout on job growth, which comes out Sept. 2, he added. 

The employment numbers could show more progress following two consecutive strong labor reports. Meantime, U.S. stock indexes continue to hit new highs after shrugging off concerns about the U.K.’s withdrawal from the European Union. 

But other signals suggests that the economy remains sluggish. Ahead of a revised growth estimate this morning, the nation’s gross domestic product -- the broadest measure of economic performance -- averaged only 1 percent over the first six months of the year.

Despite that slump, the Fed could set the stage for an end-of-year rate hike at the FOMC’s Sept. 20-21 meeting, said Mark Hamrick, senior economic analyst and Washington bureau chief at Bankrate.com.

“A number of [Yellen’s] colleagues, including Vice Chair Stanley Fischer, have recently said or hinted that the conditions are generally supportive of a rate increase in the months remaining this year,” Hamrick said by email. “So jawboning, or the effort to whip the financial markets in line with possible FOMC actions, has begun.”

Yellen is not scheduled to take questions in Jackson Hole, so will not have to comment on the prospects for a rate hike. In December, the Fed raised the federal funds rate -- what banks charge other lenders for overnight loans -- for the first time in a decade

The move to start the process of monetary normalization, which followed seven years of near-zero rates following the Great Recession, sent a chill through financial markets that have grown used to the Fed’s “easy money” policy. The S&P 500 index fell 10 percent following the December 0.25 percent hike, Societe Generale analysts noted. 

The bank is advising clients to hedge the risk of a rate hike this year “following the slightly more hawkish FOMC statement in July and recent warnings from Fed officials.”

Another issue likely to be discussed in Jackson Hole are concerns that persistently low interest rates in the U.S. and other major economies around the world could make it difficult for central bankers to respond to the next economic downturn. Central banks typically respond to slowing economic activity by cutting rates to stimulate growth -- with rates still scraping bottom, however, such a remedy is less effective. 

John Williams, Governor of the San Francisco Fed, has proposed several ways to restore central banks’ ability to combat a slowdown, including raising the inflation target or replace it with one tied to nominal GDP.

Yellen is expected to weigh in on Williams’s ideas in her talk.

While the Jackson Hole event is likely to provide fodder for markets on U.S. central bank policy, it’s unlikely to give any hints for Europe, as European Central Bank Chair Mario Draghi plans to skip the event for a second year in a row.

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