Daily Agenda: Yellen Speech Takes Center Stage

Fed chair talks monetary toolkit at Jackson Hole; deflation persists in Japan; Pew says state pension shortfall nears $1 trillion; Rouseff impeachment begins.


At 10 a.m. this morning, Federal Reserve Chair Janet Yellen will address the economics crowd at the Jackson Hole Symposium with a speech that is expected to lay out a better understanding of the central bank’s policy in the months and quarters ahead. Currently, derivatives markets linked to interest rates favor a rate hike before the end of the year by a ratio of more than 50 percent with a possibility of a hike as early as September priced in. Fed policymakers have a well-deserved reputation for managing expectations carefully, with nuanced and often vague language. Given the title of Yellen’s address, “The Federal Reserve’s Monetary Policy Toolkit,” it is entirely possible that Yellen will spend most of her time on the podium discussing how, rather than when, the central bank will act. For speculators and traders, the timing of the next hike is critical. For allocators, the more pressing concern is how steep the series of rate hikes will turn out to be. For now, the calm presented by the yield curve suggests that long-term investors are untroubled by prospects of a 25-basis-point increase, since a historically low-yield environment appears set to persist for years.

Striking Bolivian miners kill government official. On Thursday, Bolivian Deputy Interior Minister Rodolfo Illanes was abducted by striking miners in Panduro while he traveled to meet with their leaders and was later killed. The government has condemned the attack and pledged swift justice. At least two protesters have been killed this week since clashes began and 17 police officers have been wounded. The National Federation of Mining Cooperatives, formerly supporters of the administration of President Evo Morales, have organized the strikes to extract government concessions that would relax environmental controls and allow unionization of private companies. Bolivia’s mining industry is currently dominated by small cooperatives that have come under economic stress due to declining commodity prices in recent years.

Deflation still stalks Japanese economy. Data released by Japan’s Statistics Bureau on Friday indicated that inflation remains anemic with core consumer price levels declining by 0.5 percent year-over-year in July to reach a three-year low reading. Tokyo specific data for August, also released today, saw core levels decline by 0.4 percent versus the same month last year, a leading indicator suggesting nationwide CPI measures will remain under pressure in the near term. The reaction to the news in currency markets was muted as many traders saw the data as more confirmation that the Bank of Japan will pursue additional policy action at next month’s meeting.

State pensions face massive shortfall between assets and liabilities. In a report issued on Thursday, the Pew Charitable Trusts estimated that U.S. state-managed pension funds faced a shortfall of roughly $1 trillion for fiscal 2015 after market returns were weaker than 2014. The report concludes that state policymakers can no longer rely on investment returns to make up the shortfall with yields remaining near historic lows and alternative-asset managers underperforming. In addition to scaling back or scrapping entirely benefits for new and current workers—an approach already being implemented in some states—the Pew analysis concludes that tax increases may be required to meet obligations.

Rousseff impeachment begins. The final leg of the impeachment process began today for Brazilian President Dilma Rousseff, with a Senate trial expected to end by next week. As the proceedings get underway in Brasilia, indications from informal polls by media outlets suggest that a majority of Brazilians are resigned to Rousseff’s departure. With a federal deficit reaching historic highs, rising unemployment, continued recession and the ongoing Petrobras political corruption scandal tainting hundreds of government officials, Brazilians appear ready for a change.