On Friday, all eyes will be on Federal Reserve Chair Janet Yellen when she delivers her speech at the annual economic symposium in Jackson Hole, WY. Her speech is titled “The Federal Reserve’s Monetary Policy Toolkit” and investors will pay close attention for clues on future Fed policy.
In past years there has been a lot of focus on this speech as it has been used as guidance on future policy. In 2010 Ben Bernanke delivered a speech and said the Fed “will do all that it can” and that the committee “is prepared to provide additional monetary accommodation.” At the time this was a dovish speech that sparked the equity rally into the end of the year. Since 2010 the speeches have been less newsworthy with no mention of Fed Policy.
Leading up to this speech there has been a divergence in the market between interest rate sensitive equities and long-term bonds. Utilities, telecom, consumer staples, and REITs – interest rate sensitive equities – have been underperforming recently as the probability of a rate hike later this year has increased. While interest rate sensitive stocks have pulled back the bond market is sending mixed signals. Given the higher probability for a rate hike this year, the yield on the 2 year Treasury has risen to 0.77%, back to pre-Brexit levels. The longer end of the curve, the 10 year Treasury, has remained steady holding between 1.50% and 1.57%.
Many expect this speech to focus on the tools the Fed has at its disposal should a downturn occur. These tools are likely to be further quantitative easing versus negative interest rates. Any commentary on future rate hikes is likely to move the interest rate sensitive stocks and the short end of the yield curve (2 year Treasuries). The longer end of the yield curve is more correlated to economic data and inflation. Ten year yields should react less to any policy communicated in the speech.
Charlie Toole, CFA, CFP
Vice- President, Portfolio Manager
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