An abstract interest-rate metric is dominating discussions across trading desks ahead of the Jackson Hole symposium, with investors wondering if Federal Reserve Chair Jerome Powell will weigh in, and bracing for further declines in US Treasuries if he does.
Fidelity International, Jupiter Asset Management and hedge fund Blue Edge Advisors are among those pondering the implications of whether there has been an increase in the neutral rate, also known as R*.
“For most traders, R* is like the appendix – assumed to be irrelevant to daily life until it suddenly bursts and makes you painfully care about it,” said Calvin Yeoh, who helps manage the Merlion Fund at Blue Edge. Despite the market chatter, many Fed watchers reckon Powell will dodge the topic when he speaks Friday. He told lawmakers in March, “Honestly, we don’t know” where neutral is. In his first Jackson Hole speech as Fed chair, in 2018, he emphasized the inherent uncertainty around estimates of such long-run variables.
And using the history of past changes as a guide, “it would be difficult to conclude with certainty the chair would make an aggressive statement on this topic on Friday, even though the risk may lean in this direction.” By one measure, the market is already betting the Fed is behind the curve on neutral rates. A New York Fed measure of inflation-adjusted R* is hovering around 0.6%, while a swaps-based proxy — where 5-year inflation-adjusted yields will be in 5 years time — has jumped above 1%.
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