Coverage: Looking ahead to Jackson Hole

The world’s central bankers are gathering in Jackson Hole this week and officials from the U.S. Federal Reserve Board will likely face questions about how long they plan to continue keeping interest rates low.

The Wall Street Journal by Jon Hilsenrath pointed out that the improving job market might cause the Fed to have to reevaluate its position on interest rates:

In a recent Wall Street Journal survey, 30 private economists said they feared the Federal Reserve would wait too long before raising short-term interest rates, while only three said they feared the Fed would move too early.

Will the Fed fall behind the curve and keep interest rates too low for too long as the economy strengthens? The question looms as officials travel this week to their annual gathering in Jackson Hole, Wyo., where they and the world’s leading central bankers discuss economic issues.

Fed Chairwoman Janet Yellen and academic papers presented at the meeting will focus on labor markets, which are improving rapidly even though U.S. economic growth has been sluggish and erratic. Ms. Yellen seems likely to acknowledge the improving job market, though she has argued for much of the year that slack and headwinds endure after the 2008-09 financial crisis.

A growing number of economists believe slack in labor markets is diminishing, making the economy prone to inflation and financial markets prone to overshooting with short-term interest rates near zero. The unemployment rate fell to 6.2% in July from 7.3% a year ago, a decline far faster than Fed officials expected.

“They are making me nervous,” Arun Raha, the chief global economist for Cleveland-based Eaton Corp., an industrial manufacturer, said of Fed officials. “Given the strength of the job market, manufacturing and nonresidential construction, it’s about time they got rid of their low-rates-for-an-extended-period viewpoint.”

The International Business Times story by Marcy Kreiter pointed out that many Fed officials still believe the economy has some room for improvement:

Atlanta Fed President Dennis Lockhart said he thinks nothing should change until the economy is on a firm footing, but Allen Sinai, president of Decision Economics, said any move would be more effective if it were pro-active rather than reactive.

“We look for new clues on how the Fed plans to gain greater control of the Fed funds rate as it tightens policy, while the system is still swimming in reserves as a result of the three quantitative easing programs undertaken,” said Victoria Clarke, economist at Investec (LON:INVP).

With U.S. inflation figures due out Monday, the results could impact discussions. “We expect inflation data to test monetary policymakers’ resolve before the end of the year, but do not expect that challenge to begin with the July report,” Brian Jones, economist at Societe Generale (EPA:GLE), told Reuters.

Another major issue is the rising tensions in Ukraine. “Even if the issues today are resolved and there isn’t a shooting war, that ongoing tension between the Ukraine and Russia puts an underlying bid into the Treasury market,” Lou Brien, market strategist at DRW Trading (NYSEARCA:DRW) in Chicago, told Reuters.

The three-day symposium begins Thursday and is expected to center on labor markets of major economies, Reuters reported. Janet Yellen is scheduled to deliver her first speech as Fed chairwoman. Also to speak are Bank of Japan Governor Haruhiko Kuroda, Central Bank of Brazil Governor Alexandre Antonio Tombini and Bank of England Deputy Governor Ben Broadbent.

Forbes contributor Mark McSherry said that no matter what investors will continue to hang on every word publicly uttered at the meeting:

Investors will examine every word in the Fed minutes and every word spoken at the annual Jackson Hole summit for any clues on the timing of interest rate rises as the US central bank moves toward lifting rates back to normal levels after more than five years of keeping them unusually low to help the economy recover.

There are earnings from Home Depot on Tuesday, Hewlett-Packard, Staples, Lowe’s and Target on Wednesday, and Gap and Salesforce.com on Thursday, but the Fed is really the focus in the coming week.

The theme for Federal Reserve Bank of Kansas City’s annual economic conference in Jackson Hole is “Re-Evaluating Labor Market Dynamics,” with Fed chair Janet Yellen delivering the keynote speech on Friday.

Given the theme for the meeting, analysts are not expecting anything as dramatic as two years ago when then Fed chairman Ben Bernanke readied markets for the Fed’s dramatic $85 billion a month purchases of Treasury and mortgage bonds to create artificial demand for US debt and help keep rates low.

Yellen will speak on Friday in her first appearance at Jackson Hole as Federal Reserve chair. “I don’t think she’s going to go anywhere close to monetary policy,” Stephen Lewis, chief economist at ADM Investor Services, told Reuters.

Most reporters agree that Yellen is unlikely to make any large policy statements, but she is expected to talk about her reasons for continuing to keep interest rates low. What will be more interesting is seeing what the other central bankers think and what kind of policy changes ultimately come out of the meetings.