Yellen did not link financial stability to monetary policy - Nomura

Analysts at Nomura explained that chair Yellen’s speech at Jackson Hole focused on financial regulation before and after the crisis and noted that post-crisis regulation has improved financial stability without impeding growth materially.

Key Quotes:

"Importantly, she did not link financial stability to monetary policy, implying that the focus of conventional monetary policy remains on the dual mandate of price stability and maximum employment. Her subtle rebuke of the Trump administration’s approach to financial regulation makes her reappointment as Chair marginally less likely.

Chair Yellen’s opening remarks for the 2017 Jackson Hole Symposium highlighted three important points. 

First, her comments remained strictly on regulation after the financial crisis and how increased regulation has made the financial system safer without impeding growth materially. She did not comment on the economic outlook or monetary policy in general. 

With firm expectations on an expected balance sheet announcement at the 19-20 September FOMC meeting, it appears that Yellen saw little reason to say more about the Fed’s balance sheet plans. Moreover, since many of the outstanding questions around the balance sheet, such as the terminal size, remain undecided, there might not have been additional information to provide. Similarly, while the July FOMC minutes included a lengthy debate on recent inflation weakness, she likely had little to add as much of that debate remains unresolved.

Second, Yellen suggested no link made between monetary policy and financial stability, implying that the Federal Reserve still views the combination of regulation and macro prudential policies as sufficient for controlling systemic financial risk. Additionally, by not explicitly mentioning current financial conditions, she confirmed that the Fed is not particularly concerned about the recent appreciation of risky assets as a potential threat to financial stability.

While the July FOMC minutes contained an intensive discussion on the implications of the continued easing of financial conditions, Yellen showed no signs of becoming more hawkish because of the recent easing. This has particular importance for the FOMC participants’ (and our) outlook on one additional rate hike in 2017. Addressing easing financial conditions and the recent appreciation of risk assets, similar to New York Fed President’s interview last week, would have sent a notably hawkish signal to markets.

Finally, the conclusion of her speech, that increased regulation has not negatively affected growth, directly contrasts with the Trump administration’s policy position. To be clear, she argued that “any adjustments to the regulatory frameworks should be modest,” suggesting that she does not agree with the general trend of discussions on potential deregulation in Washington. We view this as marginally reducing the likelihood of her reappointment as Chair when her term expires in February 2018."