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Jackson Hole Preview

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A look at Bernanke's prior Jackson Hole speeches and the potential for QE3.

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MINYANVILLE ORIGINAL Over the past few days, I've been reading and rereading Ben Bernanke's Jackson Hole speeches from the past two years. Arguably, his 2010 speech paved the way for what would be called "QE2," the second round of large-scale Treasury purchases. I've read through many of the reactions that followed his speech two years ago, and most people did not immediately see that Bernanke was telegraphing additional purchases. The reaction was that Bernanke was "ready to provide additional accommodation as necessary." Sounds familiar, right?

The same could be said for Operation Twist and the 2011 speech, where I believe Bernanke attempted to transfer near-term growth to longer-term growth by reducing the long-term borrowing costs of the United States in order to finance greater fiscal stimulus. By some estimates, the annual interest payments of the US have been reduced by $150 billion or more. The speech also focused on the longer-term fiscal sustainability and fiscal policy of the US.

I expect much of the same from Bernanke's speech this year, with him stating that the US economy is still showing sluggish growth and that the Federal Reserve and the FOMC stand ready to provide accommodation.

I believe that Bernanke will not make any clear indication of whether or not the Fed will make additional purchases of Treasury securities and is not likely to announce any new purchases this year until the extension of Operation Twist expires at the end of the year. In previous FOMC releases over the past year, the Committee has stated that it is waiting to determine the efficacy of the new program. It is more likely that the Fed will explore new options to increase lending or nominal growth targets, such as unemployment, inflation, or GDP.

The biggest question I ask is: With corporate bond yields at record lows, Treasury yields at record lows, mortgage prepayment speeds at record highs, mortgage bond yields at record lows, and corporate default rates at record lows, what would additional purchases accomplish? Yes, in theory, these yields could continue to make record lows. But if the goal of QE is to push investors out of safe assets and into more risky, longer-duration assets, then there aren't that many alternatives left.

I do not think that the Fed will extend its rate guidance out to 2015, as has been previously expected. The Federal Reserve governors only make economic forecasts out to two years, which is why the low rate guidance has been set to that range. However, one paragraph from the most recent FOMC may suggest a change to this (emphasis mine):

Many members expressed support for extending the Committee's forward guidance, but they agreed to defer a decision on this matter until the September meeting in order to consider such an adjustment in the context of updates to participants' individual economic projections and the Committee's further consideration of its policy options.

So the FOMC may be exploring economic projections further out? Seems a bit silly, as the accuracy of these three-year forecasts would be suspect.

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