The Bernanke Nip Slip

By now you may have read hundreds if not thousands of blog posts and columns covering Ben Bernanke’s address at Jackson Hole yesterday.  I was, mercifully, far away from a computer screen or a TV so I escaped almost all of the “real-time” “coverage”.

But in combing through the reports this morning, I’ve found all I need to convince me that Fed action is likely at the September 13th meeting of the FOMC.  Because Bernanke had a metaphorical wardrobe malfunction, even though we know he is loathe to tip his hat other than through the more official channels like Jon Hilsenrath’s reportage.  But in his comments yesterday, we saw a bit more than perhaps the Fed Chairman wanted us to see.  We didn’t see a lot, but just enough.

Many sophisticated Fed-watchers agree with me that we got this hint.  Did he want us to see?  Like watching a Hollywood starlet ungracefully clamber out of a limousine or carelessly frolic in the waves, we cannot know for sure whether this was an intentional reveal.

Here’s The Economist:

He then catalogued the potential costs of further easing: impaired market functioning as the Fed’s share of total bonds in circulation rose; the potential for asset bubbles if interest rates are kept low for a long time; the threat of inflation if the Fed has trouble exiting from its purchases; and potential losses if the bonds lose value when interest rates rise. Mr Bernanke said “the hurdle for using non-traditional policies should be higher than for traditional policies. At the same time, the costs of non-traditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.”

Do conditions warrant? Yes. As Mr Bernanke put it, “the economic situation is obviously far from satisfactory.”

If Mr Bernanke has made it clear that the Fed plans to act on September 13th, he has not yet clarified how. The Fed could extend its low-rate guidance past 2014, but Mr Bernanke’s speech seemed to assign such a move less efficacy than further bond purchases. If the Fed buys bonds, would it buy Treasurys or MBS or something else? By citing housing as first among the headwinds holding back the economy, and specifying the impact on mortgage rates of prior QE, he made a prima facie case for buying MBS and Treasurys. It is still not clear, though, whether the Fed would announce a fixed amount of purchases over a fixed term, or an open-ended programme (eg, $100 billion per month, keyed to economic conditions).

Regardless of the form of this particular program, the way to play is probably some CRB exposure, select financial stocks and almost anything real estate-related.


The Road to QE3 (The Economist)

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