There is a “mystery” on Wall Street, and it has to do with central bankers. No, the mystery has nothing to do with proposals for an independent overall of the regional central bank power structure and their semi-private status, as was recently reported in The Wall Street Journal. The public knowledge regarding the process for filling regional Fed presidential appointments, and the influence of the largest banks, remains foggy at best.

The current quandary on Fed watchers mind leading into the Jackson Hole event is Janet Yellen and “the mystery of the Fed’s policy reaction function,” according to a research report from Bank of America Merrill Lynch.

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Plans to raise rates once every three months have been altered

Reading Janet Yellen’s tea leaves has been difficult if not impossible. Consider that in December 2015, the month in which the Fed raised interest rates a quarter percentage point, Fed officials provided forward guidance that interest rates were going to rise that same among every three months for the next three years.

That didn’t happen. Furthermore, recent Fed officials have been communicating in a fashion that is befuddling analysts.

“Fed communication has confused markets again this week,” the August 19 BAML Global Rates and FX Weekly report noted. “Fed speakers suggested that a hike this year was likely, but the pace of tightening would be very slow and the Fed might overshoot its inflation target.” Even here we find a confusing statement, as Fed officials have expressed concern over market stability and avoiding the need to “play catch up” and rise rates quickly.

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BAML: Market overpricing September rate hike, under-pricing December

As we approach the one year anniversary of the Fed rate hike, with the S&P 500 trading nearly 143 points above its December 31, 2015 monthly closing level of 2043.94, the Fed is tepidly looking at only one rate hike in 2016. December is currently the odds on favorite as a populist presidential election approaches, but even here Fed communications is sending mixed signals.

Fed speakers have increasingly grown hawkish about the prospects of another rate hike. Powerful New York Federal Reserve President William Dudley has been perhaps the most prominent of the regional bank presidents, even indicating on August 16 that a September rate hike was possible, again sending mixed signals. The stock market, which appears to be in a blinded race higher leading into the election, yawned and continued on its upward march. Analysts were not as sanguine.

“Fed communication has confused markets again this week,” an exasperated sounding BAML FX Strategist Athanasios Varnvakidis wrote in the report titled “Forward misguidence.” Jane Brauer, the Quantitative Strategist of the group, is also likely a bit rocked by the mathematically illogical behavior of telling the world that a dot plot showing aggressive rate hikes would be followed and then executing a go slow policy.  Along with Rates Strategist Ralf Preusser, they think “the market is overpricing a Sept hike, but may be underpricing a December hike.”

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Indications at Jackson Hole as to exact timing of the next Fed rate hike “might be difficult to find”

December is BAML’s target month for a rate hike and with Jackson Hole approaching some indications in a Yellen speech would be appreciated by Fed watchers. BAML, however, thinks that such indications “might be difficult to find” in the Kansas City Fed’s annual Jackson Hole retreat later this week.

BAML FX strategist Ian Gordon expects Yellen’s speech to mainly touch on technical details regarding money supply but not provide meaningful guidance for the date of the next rate hike.

She is likely to spend time discussing the latest star at the Fed – R*, which is the equilibrium Fed funds rate. The short-term R*, which represents the equilibrium rate impacted by current headwinds, is believed to be about 0% in real terms. With the real Fed Funds rate running below, Yellen will likely argue that policy is still accommodative. We expect Yellen to reiterate the desire to keep policy simulative, given a “risk-management” approach. There is asymmetry to policy when so close to the zero bound – hiking too quickly could derail the economy, but going slowly will simply mean a risk of having to play catchup. In this context, Yellen might argue that conditions are increasingly being met to further normalize rates before the end of the year, consistent with the latest communication from the FOMC. However, we do not expect guidance on the exact timing of the next hike.

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Is Fed misdirection setting up markets to expect the worse and then deliver good news amid global concerns?

What the report didn’t say is that in the misdirection, the Fed may be intentionally setting up markets for hikes and then delivering elation when it doesn’t happen. This is the strategy that moves the stock market higher into the election when a September rate hike doesn’t materialize.

The report noted lingering global concerns amid potential bank bailouts in the European Union as a populist referendum is approaching in Italy. “Polls do not show a clear preference for either a Yes or No vote at the upcoming crucial referendum on constitutional reform,” BAML’s Erjon Satko noted in a separate report on how the “Peripheral rally is not fundamental.” The Italian event “could have meaningful effects on both political stability and on the continuation of the reform momentum.”

With both regional and global concerns on the Fed horizon, watch for a Yellen presentation that is tempered and delicately unclear.

In the end, Fed policy is not “risk-free” and quantitative stimulus may turn out to be an addictive habit to kick, the report concludes:

We have been concerned about market addiction to unconventional monetary policies. Unprecedented volatility spikes and what appear to be diminishing returns from more policy easing in the Eurozone and Japan have justified such concerns even more this year. The Fed’s challenges normalizing policies provide further evidence. Unconventional monetary policies were necessary after the global crisis, but are not cost-free and, in some cases, might have gone too far, leading to market distortions.

These of course are the exact concerns that fund managers and market observers have been warning about, and the Fed now increasingly appears concerned. Perhaps what will be most interesting in Yellen’s speech if she addresses these addictive market stability issues.