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.