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All eyes on Yellen at Jackson Hole for new policy direction

A sleepy mountain retreat in Wyoming has become synonymous with market-moving monetary policy, and for that we have Ben Bernanke to thank.

We're about to see whether his successor intends to build on the former U.S. Federal Reserve Board chairman's tradition, by clearing up some increasingly burning questions in the financial markets.

The Fed's annual economic symposium in Jackson Hole, which begins Thursday and runs through this weekend is officially a private gathering of many of the world's most prominent policy makers and academics; only a handful of reporters are allowed through the doors.

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Yet with so many movers and shakers in the building, debating policies and delivering speeches (including, usually, an address from the Fed chairman), the markets have long paid attention to the proceedings. Bank of Nova Scotia economist Derek Holt said in a recent research report that stocks, bonds and the U.S. dollar experience significantly higher volatility in the days surrounding the Jackson Hole conference.

During his recent tenure as Fed chairman, Mr. Bernanke elevated the event to new heights of public importance – using it as a pulpit from which he signalled new Fed policy direction to what is perhaps the Fed's most influential audience of the year. For three straight years (2010, 2011 and 2012), Mr. Bernanke used his Jackson Hole speeches to lay the groundwork for important unconventional policy moves (essentially, Fed purchases of financial assets) aimed at stimulating the economy.

The Fed chairman's habit of saying something big at Jackson Hole certainly ramped up the event's market-shaking potential, as well as the scrutiny it garners from the general public. Indeed, the bond and currency markets, which have proven increasingly susceptible to Jackson Hole effects over the past few notable years, have already been gyrating for days in anticipation.

And the big question, now that Mr. Bernanke has been succeeded by rookie Fed chair Janet Yellen, is whether she, too, sees her Jackson Hole speech (set for 10 a.m. ET Friday) as the perfect forum to deliver a major Fed message on policy.

Certainly the timing would be right. As with Mr. Bernanke in years following the Great Recession, the Fed boss is again arriving at Jackson Hole at a critical juncture in monetary policy. This time, it's all about the timing of interest-rate increases, as the Fed nears its exit of quantitative easing - its bond-buying stimulus program - and prepares to enter a rate-tightening cycle for the first time since 2006.

The big question – and it fits perfectly with the "Re-evaluating Labour Market Dynamics" theme of this year's Jackson Hole conference – is how much slack Ms. Yellen and her Fed colleagues believe remains in the labour market, as that is a key driver of inflationary pressures and, by extension, of the need to start tightening rates.

One school of thought is that historically low labour force participation and elevated levels of part-time work imply that there is more slack to the job market than the relatively low unemployment rate suggests, and the Fed should wait for clear evidence that a tight job market is pushing up wages before it starts raising interest rates. The other school argues (as Bank of England boss Mark Carney recently suggested) that if a central bank waits until wage pressures are obvious, it could fall dangerously behind the inflation curve.

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Ms. Yellen already indicated earlier in the summer that she intends to flesh out the Fed's strategy toward normalizing its rate policy later in the year, as the end of QE approaches. That could wait for the next meeting of the Fed's policy-setting committee, in mid-September.

But given that the minutes of the committee's last meeting in July (which were just published Wednesday) indicate growing sentiment among committee members for an earlier start to rate hikes, Jackson Hole presents a timely opportunity for Ms. Yellen to detail the Fed's current thinking.

Thanks to Mr. Bernanke's precedent, the whole financial world will be listening. If Ms. Yellen's Jackson Hole speech doesn't at least lay out the basis for the Fed's policy timetable for the next year, it could be considered a missed opportunity.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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