What to watch out for when Yellen and Draghi meet at Jackson Hole


US Fed chair Janet Yellen is more likely to deliver monetary policy headlines at Jackson Hole this week than her European counterpart Mario Draghi, according to fund managers, as the central bankers prepare for the summit at Wyoming.

Yellen could indicate how the US Fed will unwind its “bloated” balance sheet at the annual meeting, while any indication Europe is following in the US’s footsteps on tightening would trigger volatility.

Charles Schwab UK managing director Kully Samra, who considers US stocks attractive compared to Europe because they are over the initial hump in the move to tightening, expects Draghi to be guarded. 

“Draghi’s speech will be closely monitored for an indication that the curtain is about to fall on the ECB’s QE experiment. However, the EU has very different challenges to the US economy and has not yet entered the rate rising environment that the US has,” Samra says. 

“A firm signal that the ECB is to tread the same path as the Fed will precipitate volatility and Draghi will be keen to ensure that Eurozone growth is not negatively impacted.”

However, Samra does expect some detail from Yellen on the Fed’s plan to “slowly unwind its bloated balance sheet”.

We have confidence that the Fed has little desire to jolt the financial markets, but it and the market are in uncharted territory as unwinding a $4.5trn balance has never been done historically.”

Hawkish bias from either central banker “could cause a bit of an upset”, says Paul Brain, head of fixed income at Newton Investment Management with Yellen likely to announce quantitative tightening in September.

“The only way Ms Yellen could surprise the markets is to suggest a rate hike in December, which is more likely than the forecasters currently believe.”

“Mr Draghi, on the other hand, has plenty of time to communicate the ECB further gradual reduction in QE and does not need the Jackson Hole event as a platform, even though that has not stopped him from grabbing the headlines in the past.”

Parallels with the subprime crisis

“We must follow this meeting of the central bankers closely,” says CIO and co-head of multi-asset at SYZ Asset Management Fabrizio Quirighetti.

He will be looking out for signs that central bankers are prepared to acknowledge the adverse consequences of current monetary policies, which he says is similar to the period between 2004 and 2006.

During that period major central banks began to normalise their monetary policy, having been extremely accommodative to cushion the effects of a bursting internet bubble earlier in the decade, Quirighetti says. Those low rates contributed to the subprime crisis, he says.

The difference today is subdued growth, suppressed commodity prices, lower risks from inflation and wages rising only marginally, despite low unemployment, he adds.

“There is not a lot of evidence that supports really tightening the monetary tap – but these extremely accommodative monetary policies have less and less impact on the inflation of goods and services, and more and more on financial assets and real estate.”