Fed Chair Janet Yellen and ECB President Mario Draghi gave speeches at the Jackson Hole Symposium yesterday. So what did they talk about? And how did the Greenback and the euro react? Well, read on and find out.
Fed Chair Yellen’s Speech
It was a big nothing burger
Fed Chair Janet Yellen’s speech was essentially a big nothing burger, at least with regard to her views on the economy and monetary policy, which are the two main topics that forex traders wanted and expected her to talk about.
With regard to the economy, Yellen only repeated the Fed’s mantra that:
“Substantial progress has been made toward the Federal Reserve’s economic objectives of maximum employment and price stability.”
That’s it. She didn’t really flesh out a detailed assessment of the economy nor provide her outlook, particularly with regard to the recent weakness in inflation.
As for monetary policy, she didn’t even bother to touch on the subject at all.
Yellen vs. Trump on regulations
Yellen’s speech was mostly about the regulations introduced in the wake of the financial crisis and how the U.S. and global financial system is safer because of these regulations.
And the statement below is Yellen’s own summary of what her whole speech was about.
“The balance of research suggests that the core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth. But many reforms have been implemented only fairly recently, markets continue to adjust, and research remains limited. The Federal Reserve is committed to evaluating where reforms are working and where improvements are needed to most efficiently maintain a resilient financial system.”
The things she talked about didn’t really matter much to forex traders. But as some market analysts pointed out, Yellen’s speech was essentially a defense of the regulations introduced in the aftermath of the financial crisis.
However, Trump wants to remove these regulations. As such, Yellen’s speech was, in effect, an implicit rebuke of Trump’s views.
Now, consider that Yellen’s four-year term as the Fed Chair will end on February 3, 2018. Also, consider that Trump has yet to decide on whether to renominate Yellen or replace her.
It remains to be seen if Yellen’s Jackson Hole speech will have negative repercussions on her career at the Fed, though.
Greenback bulls didn’t like it
Given the recent weakness in inflation, which affirmed the Fed’s downgraded inflation forecasts, the market was looking to Yellen to throw a lifeline that may resuscitate rate hike expectations by either providing a hawkish outlook on inflation or by hinting that one more hike may be in the cards.
However, Yellen did neither. And that really bummed market players out, which is why the Greenback tanked as a result.
ECB President Draghi’s Speech
Draghi on inflation
Draghi mainly used his speech to talk about how an open market that’s too open would often lead to protectionism, as well as the negative effects of protectionism. This seems to be a subtle jab at Trump, whose policies are viewed by many as protectionist in nature, but I’m digressing.
Anyhow, like Yellen, Draghi tried to steer clear from discussing the specifics on the Euro Zone economy and monetary policy.
In the Q&A session that followed, however, Draghi was asked about those topics. And while he was rather upbeat about the Euro Zone’s growth prospects, he had this to say on inflation (emphasis mine):
“On one hand we are confident that as the output gap closes inflation will continue converging to its objective over the medium term. On the other hand, we have to be very patient because the labor market factors and the low productivity are not factors that are going to disappear anytime soon.”
“We have not seen yet the self-sustained convergence of inflation to the medium-term objective.”
In short, the ECB is not yet confident in the recent rise in inflation and is therefore calling for patience, which is obviously a dovish message.
Draghi on monetary policy
Given the ECB’s rather dovish assessment and outlook on inflation, Draghi concluded that:
“Therefore a significant degree of monetary accommodation is still warranted.”
This is the same forward guidance that the ECB has been giving in its monetary policy statements, which implies that the ECB is still in wait-and-see mode while maintaining its easing bias on its QE program.
Draghi silent on the euro
In my write-up on What to Expect from This Year’s Jackson Hole Symposium, I noted that the market was also expecting Draghi to address the euro’s strength.
After all, the latest ECB statement did mention that “concerns were expressed about the risk of the exchange rate overshooting in the future.”
Well, Draghi was completely silent on the euro’s strength. Not one word was uttered about the euro during his speech and in the Q&A session that followed.
No news on the euro is good news for the euro
Draghi didn’t talk about monetary policy or inflation during his speech. However, market analysts say that the market interpreted Draghi’s lack of jawboning on the euro’s recent strength as a sign that the ECB is not yet too concerned, which opened the gates for euro bulls to rush in.
However, the euro’s bullish momentum skidded almost to a halt later on when Draghi gave his dovish message on inflation and monetary policy during the Q&A session.