Thursday, August 26, 2010

Must Read:Bernanke – preview of his Jackson Hole speech--- $$

images – preview of his Jackson Hole speech (10amET Fri morning)

· Bottom Line – rarely has a Fed speech/event been as anticipated as Bernanke’s address is tomorrow.  It’s not clear if expectations are getting out of hand (although there is some talk of actual policy announcements coming tomorrow, which prob. won’t wind up happening).  Bernanke has a few critical tasks to perform: 1) credibly explaining the Aug 10 decision (was it b/c MBS were maturing quicker than expected or is there heightened concern on the economy or both?); 2) articulating the policy options left to the Fed and under what conditions such options would be activated; 3) updating the outlook for growth and inflation; 4) refuting the recent WSJ article that described the current Fed as lacking consensus and the recent meeting as being “contentious”. 


· The Fed chairman will be making his first public remarks since the last FOMC meeting (Aug 10), where it was decided to reinvest maturing MBS back into Treasuries so as to keep the size of the balance sheet unchanged (vs. allowing it to gradually shrink). 

· Market confidence towards the Fed has been ebbing in recent weeks, w/investors caught off guard by the Aug 10 decision (the consensus thinking was that such a material policy action wouldn’t be adopted at that specific gathering).  The recent WSJ article discussing how the 8/10 meeting was the most “contentious” of the Bernanke tenure reinforced in the minds of investors that policymakers’ views are diverging.  Meanwhile, recent economic readings have signaled a sharp deceleration in growth (the Q2 GDP revision out Fri morning could see growth slashed from +2.4% initially to +1.4% or lower while some think the weak durable goods figure out Wed implies a Q3 GDP number sub 1%).

· Taken together (deteriorating confidence in the Fed and the tepid eco readings), there is now a ton of anticipation ahead of the Bernanke address Fri morning.

Expectations for the speech itself?

· Policy - It doesn’t seem like people are really expecting any actual policy announcements in Jackson Hole (like a reserve rate cut or outright asset purchases).  Instead, Bernanke will prob. emphasize some of the points he made during his last Humphrey Hawkins testimony back on Jul 21-22.  Specifically, the Fed chief discussed three critical options left: 1) changing communucations to the market (this would involve setting an explicit inflation target); 2) lowering the interest rate paid on reserves (now 0.25%); 3) changing the balance sheet (the Fed has already stopped the run-off shrinkage but could start expanding it outright once more). 

· With three options left, investors will be searching for a broader discussion of which option (or combination of options) the Fed would favor if further actions are required.  The next Fed meeting is coming up on Sept 21 and it is becoming consensus thinking that a re-introduction of outright QE (balance sheet expansion) could be announced then (w/TSYs being bought first). 

· Explaining the Aug 10 decision – the WSJ article of a few days ago implied that the 8/10 shift towards keeping the balance sheet unchanged was b/c the Fed didn’t want to send a tightening signal to the market place by permitting shrinkage, esp. when falling mortgage rates was causing refinancing activity to pick up and mortgages to mature faster than expected. 

· Economic outlook – the language from the 8/10 statement concerning growth may be tweaked modestly to account for the recent sluggish data (like durable goods and housing).  Back on 8/10, the Fed said the following: “the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated”.  In addition to growth, color on inflation will be important given the recent market concern about a period of prolonged deflation. 

Fed dates to watch beyond Jackson Hole

· Aug 31: minutes from the Aug 10 FOMC meeting

· Slew of Fed speakers: Duke, Fisher, Evans (9/1); Rosengren (9/2), Lockhart (9/3)

· Beige Book – Sept 8

· Fed confirmations – the Senate still needs to vote on Yellen and Raskin (this could happen when the Senate comes back into Session); the other Obama nominee for the Fed (Diamond) was sent back to the White House after certain Republicans objected. 

· FOMC meeting – Sept 21

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