Given the light economic calendar to begin the week, market participants continue to digest the events that transpired during the weekend at the Jackson Hole symposium, trying to decipher how comments from policy makers and academics will alter the trajectory of monetary policy. With representatives from the Bank of England, the European Central Bank, and the Federal Reserve all voicing confidence that the forces dampening inflation would gradually reside and consumer prices would move towards the respective bank’s policy objectives, the initial reaction of financial markets has been one of concern policy tightening may transpire sooner than anticipated given the heightened levels of volatility on the international economic landscape.
The key policy maker in the spotlight was the Federal Reserve’s Vice Chair Stanley Fischer, who sounded slightly more hawkish than recent Fed officials by stating that economic conditions warrant a gradual pace of monetary accommodation removal, but also that the Fed shouldn’t wait until inflation has reached their target of 2% before beginning to tighten due to lag on real economic activity. The basis of the market’s hawkish interpretation into Fischer comments is that while he didn’t tip his hat to when he expected the timing of the first rate hike, the international developments and volatility within the domestic stock market has not completely ruled out a September liftoff. As we surmised at the beginning of last week when financial market’s had taken the rout in commodities and equities as a sign that a September rate increase was off the table, the market’s tendency to swing to extremes would have ample time before the meeting itself to potentially stabilize and push the monetary policy pendulum back to a more neutral probability position.
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