Monday, 28 August 2017

The Yellen-Draghi Disappointment Explained

Posted by Valentine at 03:05 Labels:

And so they spoke. Just like we most of us expected in advance to the Jackson Hole symposium, no comments on monetary policy were made and markets felt betrayed.

Friday was a key day at Jackson Hole, Wyoming, because the world’s two most important central bankers were due to speak. But none of their speeches fulfilled expectations from market participants, who expected to received hints on future monetary policy changes.

First on the line was Federal Reserve Chairwoman Janet Yellen, who decided to speak on financial stability instead of any policy-related matters or current economic conditions.

Yellen pointed directly at President Donald Trump’s intention to reduce regulation for financial institutions, saying any changes deserve serious consideration from policymakers.

"Any adjustments to the regulatory framework should be modest and preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years."

Fed’s chief added that the risks derived from “excessive optimism, leverage and maturity transformation” are reappearing in new forms and policy should adjust to that challenges. However, she believes the economy stands better prepared for future turmoils.

“We have reason to hope that the financial system and economy will experience fewer crises and recover from any future crisis more quickly, sparing households and businesses some of the pain they endured during the crisis that struck a decade ago."

According to Fed funds tracked by CME Group’s FedWatch tool, investors are pricing in about a 36.3 percent probability of a 25 basis points rate hike by December, down from more than a 40 percent registered only a week before.

European Central Bank President Mario Draghi took the microphone on Friday afternoon, also avoiding any comments on policy deliberations but with a clear message against protectionism.

“Openness to trade is under threat, and this means that policies aimed at answering this backlash are a vital part of the policy mix for dynamic growth [...] A turn towards protectionism would pose a serious risk for continued productivity growth and potential growth in the global economy.”

His remarks came less than a week after President Trump said the NAFTA deal was possibly going to be ended as it presented no favorable conditions to the United States.

In reaction to Draghi’s speech, the euro rose to a 2-½ year high against the greenback. It seems that investors would have to wait until Fall-Winter for policy announcements.

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