Economic and market briefing – all eyes on Jackson Hole
0Market expectations for an imminent Federal Reserve easing shift by the day, so it’s no surprise that the focus is on the Kansas City Fed’s annual Jackson Hole symposium with Fed Chairman Bernanke giving the opening remarks at the Economic Policy Symposium today at 1500hrs our time (31st August 2012).
Looking back, in 2010, Fed Chairman Bernanke used this forum as an opportunity to present different policy easing options and to hint at his preference for large-scale asset purchases (QE2). This year, Bernanke may again discuss the costs and benefits of various policy alternatives – a defined QE3 operation, flexible asset purchases, new communications strategies, cutting interest on reserves, funding for lending, adherence to simple policy rules, etc. But those expecting Mr Bernanke to provide clarity on the likelihood of a September QE3 kick-off (or some other easing innovation) look likely to be disappointed.
The theme of this year’s symposium is “The Changing Policy Landscape,” which gives Mr Bernanke great leeway on subject matter. Last year, Mr Bernanke’s Jackson Hole address was not policy-oriented, but was instead focused on the long-term potential of the US economy. Yet, less than a month after that speech, the FOMC initiated Operation Twist. This should remind that a hint from the Chairman is neither a prerequisite for nor an assurance of action by the Fed’s Open Markets Committee (FOMC).
The minutes of the July 31st/August 1st FOMC meeting indicated that the voting members of the Committee were predisposed at that time to ease policy further (but not prepared to act then) and the probability of a large scale asset purchase announcement (QE3) or some other easing innovation in the months ahead does look quite high. But the probability of such action as soon as the September 12th/13th FOMC meeting does not look assured by any means. Certainly domestic economic data has recently been mixed, but improved financial conditions lessen the urgency for imminent Fed easing, and more broadly, prospective action by the European Central Bank (ECB) to calm European markets reduces the need for the FOMC to provide extra help as a sort of insurance policy against a Euro-related accident.
If these assumptions are correct, Mr Bernanke’s speech today is likely to be even-handed, with an objective of having little or no market impact. As a second scenario, if Mr Bernanke is ready to provide more accommodation soon, he could say as much today to prepare the markets for such an outcome. However, given thin markets (and it’s the US Labor Day on Monday), Mr Bernanke will likely seek to avoid anything that can be construed as overtly negative on QE.
On balance, Mr Bernanke may choose to speak as he did in 2010, discussing the economic outlook, Fed policy responses to date, and then the costs and benefits of future policy alternatives. The minutes of the July 31st/August 1st FOMC meeting could provide the outline for policy option remarks.
For the sake of completeness and for easy reference, we offer some excerpts from the minutes about which Mr Bernanke may elaborate in his Jackson Hole address as an appendix – and amidst the uncertainties on Fed policy, we can at least be confident that the FOMC is not contemplating tightening, and nor are any of the other major global central banks .
Appendix – cuts from the FOMC July 31st/August 1st meeting minutes
On QE3 benefits and costs: “Many participants expected that such a program could provide additional support for the economic recovery both by putting downward pressure on longer-term interest rates and by contributing to easier financial conditions more broadly. In addition, some participants noted that a new program might boost business and consumer confidence…some participants expressed concerns about the effects of additional asset purchases on trading conditions in markets related to Treasury securities and agency MBS, but others agreed with the staff’s analysis showing substantial capacity for additional purchases without disrupting market functioning. Several worried that additional purchases might alter the process of normalizing the Federal Reserve’s balance sheet when the time came to begin removing accommodation. A few participants were concerned that an extended period of accommodation or an additional large-scale asset purchase program could increase the risks to financial stability or lead to a rise in longer-term inflation expectations.”
On flexible asset purchases: “Many participants indicated that any new purchase program should be sufficiently flexible to allow adjustments, as needed, in response to economic developments or to changes in the Committee’s assessment of the efficacy and costs of the program.”
On Funding for Lending: “In light of the Bank of England’s Funding for Lending Scheme, a couple of participants expressed interest in exploring possible programs aimed at encouraging bank lending to households and firms, although the importance of institutional differences between the two countries was noted.”
On Simple Policy Rules: “A staff presentation summarized research on the efficacy of alternative simple monetary policy rules in fostering the Federal Reserve’s monetary policy objectives of maximum employment and price stability. The presentation reviewed the characteristics of a variety of rules and noted a number of reasons why current conditions might warrant deviating from the prescriptions of simple rules designed for more normal times.”
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla
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The Local Authority Treasurers’ Investment Forum September 25th, 2012, London Stock Exchange
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