MBS Morning: What is Jackson Hole (And What it Isn't)

The Fed's annual Jackson Hole symposium has often served as a venue for the Fed Chair to offer a sneak preview of impending policy changes or simply to provide a more candid assessment of how the Fed may react to potential changes in employment and inflation heading into the new year.  While this year's example certainly fills at least one of those roles, it's also important to understand its limitations.  

The biggest complicating factor is covid.  Specifically, the delta variant and the resulting case count surge are ongoing problems.  The Fed has already said that policy changes may need to be on hold due to potential economic impacts from the delta variant and we're not likely to see a major change in the pace of new cases/deaths/hospitalizations in the next 4 days.

That means Powell's hands are fairly well tied when it comes to offering any sneak previews.  At the very least, it would be hard for him to say much that hasn't already been said in recent speeches as well as last week's release of the minutes from the last Fed meeting.  More to the point, it would be hard for Powell to surprise markets with aggressive taper talk in light of the delta surge.  Specifically, comparing the Wednesday of the Fed meeting to the most recent Wednesday, cases and deaths more than doubled.

While these disclaimers make logical sense, it remains to be seen how well they've deterred traders from taking sides ahead of time.  In a perfect world, we might assume that yields are trading in a low, narrow range centered on 1.25% as they wait for some imagined clarity from the Fed.

But it could just be that markets fully understand the Fed's hands are tied for the aforementioned reasons and that the thing we're really waiting for is clarity on the covid situation.  This doesn't mean Powell's speech can't cause some volatility.  Rather, the point is that we shouldn't wait for that speech as some magical turning point that informs the next several weeks of rate momentum.