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Getting Ready For Janet Yellen’s Speech at Jackson Hole


A black hole is a region of space having a gravitational field so intense that no matter or radiation can escape. Even light is held captive to the overpowering forces of its gravitational field. It is an enigma of science, where the rules of space and time are altered, and our grasp on physics is confounded. As the markets prepare for Janet Yellen’s speech at Jackson Hole, Fed policy is at risk of a radical paradigm shift that could alter its mandates for the foreseeable future. Such a shift is unmerited in my opinion, but there have been external ruminations and Federal Reserve comments indicating that the very tenets of monetary policy are being questioned. If such policy change is adopted, make no mistake, the economy will be approaching the unknown, where our understanding of economics and market dynamics will provide minimal navigational help in a warped monetary world of time and space.

The dual mandate of the Federal Reserve is to adopt monetary policy to maximize economic growth while keeping inflation within an acceptable range – its stated target is 2%, as measured by the core PCE deflator (currently at 1.6%). The fixed income markets have become acclimated to the Federal Reserve moving its goalposts when it is poised to normalize rates. Years ago, it was indicated that an unemployment rate below 6.5% would be an accurate indication of when the Fed would act. Then 6%. And so on and so forth. While endogenous economic data currently fits the timeline of rate normalization (accelerated wage growth, increasing price measures, low unemployment, etc.), there are indications that the Federal Reserve is starting to adopt the point of view that rates are already normalized – at least a couple of members are advocating such. James Bullard, the president of the St. Louis Fed, has stated, “The best that we can do today is to forecast that the current regime will persist and set...