Jackson Hole preview

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The WSJ’s Hilsenrath has published his Jackson hole preview this morning. He hints at more stimulus, noting that:

Mr. Bernanke and his colleagues, once again disappointed by slow growth and small employment gains this year, are formulating another new dose of monetary stimulus to be considered at their next policy meeting in mid-September.

So when the chairman speaks Friday morning at the central bank’s annual retreat here, he must once again address whether there is more the Fed can do to get the economy going and whether it is worth taking chances on controversial new programs. All along he has argued these efforts are worth it and appears likely to stick to that line in his speech.

My expectation is the Bernanke will say that the recent data has not changed his assessment of the outlook, and re-iterate the August minutes’ sentiment that the Fed will do more if required.

My guess is that this will underwhelm markets, which would like a rolled gold guarantee that QE3 will begin in September. If i am right about his tone, equities are likely to sell off a little, the USD rally, and bonds bear steepen.

Ultimately, I think it likely that the Fed eases monetary policy further at their September meeting (say a 70% chance). When it comes, it is likely to be a combination of MBS and long UST purchases. The FRBNY staff researchers recently weighed in against IOER cuts (which i have never regarded as good policy), so i would say that these are off the agenda.


  1. Looks like markets are already falling in anticipation of what you’re saying. ISM comes out on Monday night too, then jobs next Friday. Could be an interesting couple of weeks.

  2. When will market participants realise there is nothing the Fed can do.

    Now if the Fed wanted to reduce L-T interest rates it can simply stand in the market and set the 10-Y Treasury at any yield it wished (just like they do at the short end).Volume related QE is totally useless (and contrary to popular opinon, is NOT money printing).

    But even if the Fed choses to lower rates L-T rates, what good does it really do? The lower cost to borrowers is offset by lower income to depositors, so there is zero net financial assets created with this policy. The only real hope from lower rates is to re-start the credit cycle, which if successul would only work for a very short period of time given the scale of US private debt today.

    US congress is the only body who can re-start the economy.

  3. Everybody knows unemployment in the US is set to stay high for a few years and there is nothing that can be done to change that. Public and private debt are already too high, rates already too low. But markets do not care anyway… company profits are healthy. Slowly this anemic economy is going to get established as the new normal. I do not think markets will fall that much, even without additional easing. Sellers only want to buy cheaper! To really significantly fall the markets need clear signs of a new recession upcoming …. but it is not easy to recede when you are already at the bottom!

    1. What rubbish. The us can employ any person who wants a job. Public debt is not too high. A sovereign currency issuer under a floating exchange rate regime can never run out of money. US unemployment is a choice.

      1. “Public debt is not too high. A sovereign currency issuer under a floating exchange rate regime can never run out of money. US unemployment is a choice.”

        anything else you wish to add? something like “all US citizens can be billionaires if they want to since they can print their own money”

  4. Looks like Bernanke stands by his the “central bank never runs out of ammo”. However he seems to be a bit more circumspect about impacts. My gut tells me that the comms piece (or really fed credibility) is just as important. I think things arent working as well as desired because the agents don’t believe the Fed’s credibility to maintain higher than target inflation to reduce employment in short run.

    Maybe something radical is necessary. Hopefully the GOP win and supply side gets loosened significantly. That should help. I wonder whether radical monetary policy (maybe something like expanding OMOs to shadow banks or NGDP targets with futures market) shifts are being quietly considered at the Fed. Quietly because if they were leaked current monetary policy effectiveness would be imperilled.

    Ps – I agree that the NGDP futures market idea isn’t clear. Sumner hasn’t been able to provide a clear and complete enough description of it’s mechanics. But it seems like an awfully important piece of the puzzle to an NGDP target.

    1. He seems to now refer to it as a prediction market, like Intrade.

      The thing I don’t get is what would stop someone taking a large (multi-billion dollar) position in the bond market and then sacrificing a few tens or hundreds of million in the prediction market to get the Fed to take an action that makes the larger bond market position pay off.

      But anyway, very exciting news. Perhaps the US can be saved from a Japanese story.

      1. Yeah, i do not think Sumner’s implementation concept is practical – i stopped reading him because i felt that this was the interesting bit, and that all he had was ‘hand-waving’.

    1. Wow, not just in length either (97p). Woodford is just about the biggest name in the field.

      Perhaps i need to read this and re-consider.

      1. Looks like the Market Monetarists are having a party. Check out Beckworth, Sumner and co.

        Bloomberg.com editors have endorsed a closer look at NGDPLT.

  5. Ssec

    I did not suggest a sovereign currency issuer could make everyone millionaire. That silly statement is yours alone.

    However the us government is not financially constrained – it is constrained by real resources. There is an abundance of freely available resources in the us (ie labour). Unemployment is a choice of the government.


  6. Ricardo

    I found your views on fx intervention curious to say the least. Am I right in saying you believe the market is bigger than the rba when it comes to fx intervention. So long as the rba is a seller of aud, how can the market be bigger than the sole monopoly issuer of Aussie dollRs? Do you beleive the rba can run out of local currency? How?

    1. He already explained … do you read the posts at all?

      The RBA can’t run out of AUD, obviously… but the do have an inflation mandate last time I checked. So they can’t print ad-infinitum, unless they give up their 2-3% inflation target.

      If inflation is not a problem right now, then the first obvious step is to lower rates further. Stevens said that himself last week. Until you reach zero, and if inflation is still too low then, you print more.

      1. Thanks ssec. That covers it.

        If there are specific questions regarding any of the QnA i am happy to do some more explaining.

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