Will the cry of the hawks echo from the Tetons and drown out the coo of the doves? As investors look ahead to this week's Jackson Hole symposium for central bankers, one of the key worries is that attendees from the US Federal Reserve will make more hawkish statements than expected – in particular, signaling early US interest rate rises.
But despite the "taper tantrum" in the markets last year, after the Fed first hinted it would taper quantitative easing, investors shouldn't concentrate too heavily on any "rate rage" ensuing from Jackson Hole. Instead, they should stay focused on the facts - which today speak in favor of low interest rates - and position themselves in response.
Investors cannot simply dismiss the Wyoming-based symposium; the forum has witnessed significant Fed statements in recent years. Then-Fed Chair Ben Bernanke used his Jackson Hole speech to hint at future monetary policy changes in 2010, 2011, and 2012. Given the current starting point, any such change at this year's symposium would almost have to be hawkish.
The Jackson Hole symposium will also be one of the first opportunities for leading economists to oppose Fed Chair Janet Yellen's dovishness and call for an earlier rate hike. One of my colleagues recently used the term "rate rage" to describe any future sharp market reaction to the prospect of increases in US rates. But investors should look through any rage that comes as a result of the symposium, and stay focused on the facts as they relate to the Fed and its view of the underlying economy.
True, US GDP growth is robust, inflation is approaching the Fed's 2-percent target, and the current 6.2 percent US unemployment rate is not far from the 5.2-5.5 percent rate which the Fed considers consistent with full employment.
However, investors should recall that Yellen is a labor market economist who has been both persistent and consistent in her view that labor market participation should increase as the economy recovers. This means that broader labor market measures carry far more weight in this economic cycle than the usual mix of growth, inflation, and unemployment rates.
Looking here, the U6 unemployment rate, which takes into account part-time workers and those marginally attached to the labor force, remains far below pre-crisis levels. More than 1.2 million people who are considered out of the labor force are currently seeking a job, with little fiscal stimulus emerging from Washington to help.
And wage inflation is very low. To push up the personal consumption expenditure (PCE) inflation measure targeted by the Fed, wage inflation would have to rise from its current rate of around 2 percent, to 3-4 percent year-on-year.
Of course, if economic growth continues, unemployment falls, inflation and wages rise and broader measures of the labor market suggest that spare capacity is declining, Yellen will respond with tighter policy. But if they don't, she won't.
So how should investors respond to this? It's not about judging whether policy is right or wrong, but working out what is likely. So while the hawks may cry, the data suggests that current policy will be maintained for now, and investors can remain comfortable with positive positions in equities and high-yield credit.
But to prepare for volatility, investors should remain cautious on adopting an overweight position in government bonds, which offer little insulation against higher rates, and especially the dollar-denominated sovereign debt of emerging market issuers that have demonstrated a particular sensitivity to higher US borrowing costs.
Overall, the Jackson Hole Symposium will be one of the first opportunities for leading economists to oppose Yellen's dovishness. As such, investors should not be surprised by circling hawks – and they shouldn't concentrate too heavily on any "rate rage". Instead, they should stay focused on the facts, and continue to position themselves positively in response.
- Commentary by Mark Haefele, the global chief investment officer at UBS Wealth Management.
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