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Jackson Hole Agenda: What's Next for the Fed and ECB?

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NATHAN PETERSON: Hello, and welcome to the Schwab Market Snapshot for August 22. I’m Nathan Peterson and I’ll be your host for this week’s segment.
Today I’m joined by Kathy Jones, Schwab’s chief fixed income strategist, to get her take on this week’s Federal Reserve symposium in Jackson Hole, and what that might mean for the bond market. Kathy, welcome back.
KATHY JONES: Thanks for having me, Nate.
NATHAN: So, Kathy, this week Fed Chair Janet Yellen is going to be joined by European Central Bank President Mario Draghi. What do you think is going to be the focus of their discussion?
KATHY: Well, I think both of them will express some satisfaction with the improving trend in economic growth—both in Europe and the U.S.—so they’ll be rather upbeat about that. But I think that’s where they’ll diverge in terms of their messages.
For Yellen, this is likely to be her legacy speech. Depending on whether she’s reappointed to the Fed or not, it may be her last Jackson Hole conference. And she’s chosen to speak about financial stability. So I think what she will do is express satisfaction that the banking system is much more stable than it used to be, and that we’re set for a positive trend in terms of economic growth.
And that will in turn lead her to a discussion of reducing the Fed’s balance sheet, which we think will begin fairly soon, September or October. So that message will be somewhat hawkish in terms of policy.
On the other hand, Draghi, although things are improving in Europe, has only—the ECB has only one mandate and that’s to reduce inflation or to keep inflation within their 2% target. They’re falling short of that, so he’ll probably indicate that they will continue to be in bond-buying mode, although maybe pare that back later this year or early next year. So he’ll be somewhat more dovish, we think, while she’ll be somewhat more hawkish.
NATHAN: And do you expect any kind of market reaction after they finish up the conference?
KATHY: Well, if we’re right about that, it should be supported to the dollar, because the Fed will be tightening policy sooner rather than later. While the European Central Bank will be on hold in terms of easy policy, so that should be good for the dollar.
And, secondly, it probably will mean higher U.S. interest rates relative to those in Europe. It would be the logical outcome of those sorts of messages.
NATHAN: That’s interesting. And speaking of bond yields, they’ve been relatively subdued—in fact, the ten-year is almost pushing back towards that year-to-date low around 2.1%. Do you think investors are being too complacent or should clients be concerned about this?
KATHY: We are a little concerned about complacency in the market. I don’t think that when you look at the fixed-income market in general that it’s really priced for tighter policy or an increase in volatility. So as you mentioned, yields are quite low across the yield curve, and there’s room for them, I think, to move up from here, not much, but moderately.
But also, in the credit-sensitive areas of the market—like high-yield bonds and investment-grade, even in short-term municipal bonds—valuations are very high, and investors aren’t really getting a lot of risk premium to compensate them for the extra risk. So we’re being a little bit cautious here and think that investors should really be aware of the risks that they’re taking.
NATE: That makes sense. Well, thanks so much for your insights, Kathy. If you want to read more from Kathy you can do so in the Investing Insights section on, or you can follow her on Twitter @KathyJones.
That’s all we have for this week, and we’ll be back. Until next time, invest wisely, own your tomorrow.

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