US: Yellen may cite patient policy response to easy financial conditions - ING

Viraj Patel, Research Analyst at ING, explains that while they think Fed Chair Janet Yellen's speech at Jackson Hole this week (Fri) will be a more sombre affair, at least relative to her ECB counterpart, the focus on financial stability could raise some interesting policy and market questions.

Key Quotes

“In addition to the inflation debate, the July FOMC minutes pointed to two members expressing contrasting views on another major issue: the interpretation of easier financial conditions and what the appropriate policy response should be. Though one member noted that easier financial conditions may warrant tighter monetary policy (the conventional wisdom), another floated the more avant-garde view that elevated risky asset prices were a response to markets adjusting to a structurally lower equilibrium interest rate. This implies that in the absence of inflation, there may be little need for additional Fed rate hikes to tighten financial conditions. We tend to agree here, especially as broader US financial conditions are now clearly becoming less responsive to adjustments in the short-term policy rate. This may well be the same conclusion that Chair Yellen reaches in her speech this week, which in theory shouldn't prompt any major re-pricing of Fed policy expectations.”

“If we're wrong – and Chair Yellen does allude to a steeper Fed tightening path – then not only would short-term US rates and the $ move higher, but there is only one direction for risky assets, and that is down. This is certainly the case if US or global politics also continues to weigh on broader risk sentiment in the near-term.”