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Fed Chair Yellen set to deliver what could be historic speech in Jackson Hole

  • Fed Chair Janet Yellen will be speaking Friday during the central bank's annual conference in Jackson Hole, Wyoming.
  • The topic of the speech is financial stability, and Fed watchers are looking for Yellen to lay out a blueprint for the future.
  • Yellen's term expires in February, and President Donald Trump has not indicated whether he will reappoint her.

Janet Yellen will be giving what could be her last speech Friday as Fed chair at the annual gathering in Jackson Hole, Wyoming, closing out a remarkable decade in central banking history.

Whether Yellen gets reappointed in February is an open question. President Donald Trump has expressed disdain and respect for her and has not committed to the future.

However, Wall Street has been bracing for a new Federal Reserve leader, with speculation that the next chair could come from within its own ranks.

"My best guess is that it doesn't seem likely that she's going to be reappointed," said Luke Bartholomew, investment strategist at Aberdeen Investments. "That kind of technocratic decision-making that you think of with the way the Fed does business is not really in style at the White House."

Gary Cohn, Trump's lead economic advisor and the former chief operating officer at Goldman Sachs, is most often mentioned as Yellen's successor. Former Fed Governor Kevin Warsh is widely considered the next most-likely chair.

"The concern is that a new person would come in and fundamentally shake up the way the Fed does policy," Bartholomew said. "In the short term, at least, I think the market would be concerned about what that change would mean."

Janet Yellen at the Jackson Hole economic symposium in Moran, Wyoming, Aug. 25, 2016.
David Paul Morris | Bloomberg | Getty Images
Janet Yellen at the Jackson Hole economic symposium in Moran, Wyoming, Aug. 25, 2016.

For her part, Yellen has brushed aside questions about her future. She professes to be focused on the job at hand, which is a significant one — namely, guiding the Fed from a path of the ultra-accommodative crisis-era policies to a more normalized stance. That includes higher though still low rates and the first steps toward unwinding the mammoth $4.5 trillion balance sheet of bonds the Fed accrued during its economic stimulus efforts.

With all that in play, Fed watchers expect Yellen's speech to be less a valedictory look at the past and more a course-charting path for her successor.

"I don't think she's going to use (Friday's) speech as her legacy, but I do think she and the Fed are concerned with what happens after they leave," said Michael Arone, chief investment strategist at State Street Global Advisors.

Speaking of former Fed chairs, Arone said "[Alan] Greenspan was the 'maestro' until it fell apart, [Ben] Bernanke was credited with saving the markets but then criticized for keeping policy too easy. I think Yellen is very concerned with post-tenure bubbles popping and what will happen. Will she be a scapegoat for that?"

Indeed, the topic of Yellen's speech is slated to be financial conditions, in what could well be a look at how much they've eased and the future ramifications.

This moment comes nearly a full decade after the Fed began cutting its benchmark funds rate, in September 2007 in the face of the burgeoning financial crisis that threatened the nation's banking system and ultimately pulled the economy into recession. By December 2008, the funds rate had been sliced to near zero and the Fed began buying bonds in an effort to generate liquidity and keep interest rates low to spur the housing industry.

By the time Yellen took over in February 2014, the Fed was still at zero but had pumped up its balance sheet with trillions of bonds. Stocks were on their way to the second-longest bull market in history, but the rest of the economy remained in question. While asset values have soared, wage growth has been muted and wealth disparity has hit historic levels. The unemployment rate has hit a 16-year low of 4.3 percent but inflation remains persistently below the Fed's 2 percent target.

Still, the Fed has pushed ahead with four rate hikes that began in December 2015 and is now preparing to start unwinding the balance sheet. Yellen's legacy then will be judged largely in retrospect — on whether all that proceeds with limited disruptions to the economy and markets.

"Financial stability is really important," said Paul Sheard, chief economist at S&P Global. "If you have a financial crisis and you have financial instability, you really throw the economy into a lot of turmoil and you can't be achieving your objectives."

Sheard believes an "objective assessment" of Yellen's term would see her get "very high marks."

"One of her great achievements over the course of her four-year tenure was to communicate how the Fed would go about starting to unwind its balance sheet, to lay out the principles and start the process," he added. "When historians look back, that will be seen as a major achievement of her chairmanship."

As for Friday's speech itself, Sheard said he hopes "there are some substantive kinds of thoughts and analysis than just the normal boilerplate stuff that you get from central bankers. If it is her last Jackson Hole speech, leaving some legacy in terms of a speech that has a longer shelf life, that's what you'd look for."

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