Markets are more likely to get a schooling on the labor market than a road map for rate hikes when the Fed meets in Jackson Hole in the week ahead.
The annual Fed symposium is a highlight of the summer, and has been widely anticipated as an event where Fed Chair Janet Yellen may disclose some hints about the process to normalize rates when she speaks Friday.
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The symposium is titled, "Reevaluating Labor Market Dynamics," and Fed watchers expect to hear more about the ongoing debate within the Fed on labor slack. They also say Jackson Hole may have a limited impact on markets and the release of Fed minutes two daysearlier may be even more market moving if there is any discussion of operations the Fed might use after its quantitative easing program ends.
"I think there are great expectations about what might come out of this ... In recent years, Jackson Hole has been the spring board to policy changes," said Ward McCarthy, chief financial economist at Jefferies.
In 2011, it was followed by the "Operation Twist" bond buying program, and there was quantitative easing in 2012, but he doesn't expect the same this year, he said.
In addition to the Fed, geopolitics—particularly the tense situation in Ukraine—will hold the market's focus, and there is a list of economic reports including CPI inflation data Tuesday. Housing data will also be important with home builders sentiment Monday, housing starts Tuesday and existing home sales Thursday. Earnings season is nearly over, so just a few big names are expected to report, including Home Depot, Lowe's and Hewlett-Packard.
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But Jackson Hole gets top billing even though it may not deliver anything new. Markets are expecting Yellen to carry a dovish message, so if she sounds in anyway hawkish, there could be a big reaction.
"My thinking is the title of the symposium suggests to me that Janet Yellen is going to make her case for the dashboard on the labor market, rather than the relying on the unemployment rate," McCarthy said. He said the Fed is making the conference more academic this year, and both sides of the debate will be heard from.
Yellen views the labor market as too weak, because of things like long-term unemployment, the low participation rate and the high number of individuals who want full-time jobs but can only find part-time work. Other Fed officials believe the labor market is healing, and the Fed should move sooner to hike rates.
Euro-phobia
As has occurred a number of times since the financial crisis, the Fed meets in August while the markets monitor and worry about Europe. Europe's economy has been weakening and traders fear sanctions on Russia, a major European trading partner, are making it worse. For that reason, developments between Russia and Ukraine have the ability to unnerve markets.
Therefore, European Central Bank President Mario Draghi will be a highlight when he speaks at Jackson Hole Friday afternoon.
Interest rates in Europe have moved lower as the weak economy stirs expectations for ECB action. Investors drove German bund yields to record lows in the past week, and some shorter duration yields turned negative. On a relative basis, buyers found U.S. Treasurys more attractive, driving yields sharply lower. The 10-year Treasury yield fell as low as 2.31 percent Friday, the lowest level since June, 2013. Weaker economic reports, including this week's flat retail sales, and short covering were blamed for the move, in addition to the move in European yields and concerns about global growth.
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"We're back to the bond yield knocking on the door of rates that prevailed before the taper tantrum a year ago," McCarthy said. "It's hard to see that that could be sustainable but there aren't too many people willing to get in front of a fast-moving train … I think some of the hawkish comments by (Dallas Fed President Richard) Fisher, (Philadelphia Fed President Charles) Plosser and (St. Louis Fed President James) Bullard are trying to be pre-emptive."
George Goncalves, head of interest rate strategy at Nomura, expects the Fed to give a nod to geopolitical issues, particularly the situation with Ukraine. "I can't imagine them coming out and then looking aloof to all these crises going on.
They can't act in a vacuum. They know if this thing continues, U.S. growth would slow down. If these kind of confidence destroying news headlines continue and people start to assess their business needs going forward, the U.S. is not immune," Goncalves said.
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Goncalves said it would help if Yellen would explain what's actually on her dashboard and what metrics she is watching that make her see so many negatives about the labor market. "We've had some improvements. She can't say it's all bad. There's some metrics that don't look so good but one could argue the slack is not as bad as it was before," he said.
"But really, is this the symposium where once and for all, the academics start to agree or go in one direction on structural versus cyclical? Are the people really off line that lost their jobs that are never going to come back? Or are they going to come back once the labor market improves?"
Pimco strategist Tony Crescenzi said the minutes of the Fed's last meeting may actually be more market moving than what comes out of Jackson Hole. At the July 30 meeting, the Fed agreed to taper back another $10 billion from its bond buying program, but there was no press briefing or change in forecasts.
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"At the end of the day, investors will be looking at whether there's any indication of a time line" on rate hikes, Crescenzi said. He said the market often reacts negatively to the Fed minutes. "It tends to fall on the day of the release of the minutes because markets sense that the Fed is getting closer and closer to raising rates."
McCarthy said the minutes should be interesting. "They do tend to sanitize them … I suspect there will be some lively discussion. They key thing is, are they making progress in agreeing on a policy normalization strategy."
What to Watch
Monday
Earnings: Urban Outfitters, Jumei
10:00 a.m.: NAHB builder sentiment
Tuesday
Earnings: BHP Billiton, Home Depot, Medtronic, Dick's Sporting Goods, TJX, Elizabeth Arden, La-Z-Boy
8:30 a.m.: CPI
8:30 a.m.: Housing starts
8:30 a.m.: Building permits
Wednesday
Earnings: Hewlett-Packard, Lowe's, Target, Staples, EatonVance, JA Solar, Hain Celestial, PetSmart, JM Smucker, L Brands
7:00 a.m.: Mortgage applications
2:00 p.m.: FOMC minutes
Thursday
Earnings: Gap, Intuit, The Buckle, Dollar Tree, HormelFoods, Salesforce.com, Gamestop, Ross Stores, Brocade, Aeropostale, Royal Ahold, Mentor Graphics
8:30 a.m.: Jobless claims
10:00 a.m.: Existing home sales
10:00 a.m.: Philadelphia Fed survey
10:00 a.m.: Leading economic indicators
1:00 p.m.: $16 billion 5-year TIPs auction
Friday
Earnings: Ann, Foot Locker, Royal Bank of Canada
10:00 am Fed Chair Janet Yellen at Jackson Hole
2:30 pm European Central Bank President Mario Draghi
—By CNBC's Patti Domm