Despite a hurricane disrupting oil and gas production in the Gulf, the Republican National Convention and new housing data, the big financial news this week is going to come from a small town in the mountains of Wyoming. So, what should investors expect from Jackson Hole?
- Ben Bernanke's speech on Friday morning will be the single biggest market mover.
- Mario Draghi will not be there, but he will influence markets.
- The symposium precedes a long weekend which will impact market response.
With economic data looking slightly better than it did at the beginning of the month, I expect that Chairman Bernanke will not use Jackson Hole as a platform to make an impassioned speech about the need for QE3. If anything, he will keep the embers smoldering by hinting to the market that asset purchases might still be in the cards, but he will not give a clear signal of their imminence. Functionally, this means no QE before the election.
However, the makeup of the FOMC leads me to believe that Bernanke is feeling considerable pressure from a dovish committee to act on employment. As the August 1 Minutes note and I have explained previously, this leaves the Fed with a couple options. Most notably, I expect Bernanke to talk about ways to spur lending and free up more capital in the mortgage backed securities market. If he dwells on this topic (be it dwelling on reduction of rates paid on bank reserves or dwelling on "Funding for Lending"), that could be a signal of things to come from the FOMC. However, depending on his tone and framing, he may simply be acting as Professor Ben examining some possible policy options.
Regardless of whether he hints at spurring lending or addresses QE rumors, I fully expect the Chairman to take this platform of sympathetic economic leaders to address the recent renewed push for a Fed audit. The Republican Party has adopted this policy as part of their official platform and I have clearly explained why the research in economics indicates that this is a flawed plan. Despite these flaws, the politics have forced the Fed to take this policy seriously. This week they took the preemptive step of publishing unaudited combined Federal Reserve Bank financial reports on a quarterly basis. These reports have the stated goal of providing "greater transparency by communicating financial information on a more frequent basis and in greater detail." Essentially, the Fed is trying to appease politicians enough to head of a move by Congress to conduct an invasive audit. I expect that Bernanke might use his soapbox in Jackson Hole to highlight this transparency battle to the economics and central banking communities in order to garner support for continued central bank independence.
Mario Draghi's lack of attendance at Jackson Hole already has and will continue to impact markets. I read this as a clear sign that he could not make a strong statement about German support for the ECB plans, so rather than spouting more platitudes about what is to come, he elected to stay home.
On the bright side, Draghi's lack of attendance means that the downside risk of weak statements from Draghi no longer exists from Jackson Hole. However, the markets are feeling significantly less optimistic about an imminent ECB plan since Draghi has chosen not to speak. So, all we can do is hope that part of Draghi's "heavy workload" involves getting the Germans on board so that he can deliver on the high expectations he has stoked in the markets over the last couple months.
In examining the upcoming Jackson Hole Symposium I initially struggled to determine how Bernanke's impact on Friday's market would play out in conjunction with Draghi speaking on the Saturday of a long weekend. But, since Draghi is no longer speaking, I expect to see a lot of movement on Friday during and immediately after Bernanke's speech, then a large drop in volume in the afternoon. Since nobody needs to be predicting how to play Draghi's comments the next day, they can safely go on vacation once they have responded to Bernanke's news. This means that if the market is really disappointed by no news of QE, an afternoon rebound is unlikely to be as significant as we have seen in past market disappointment about lack of QE.
PIMCO is expecting no QE and Barclays is saying just the opposite. I side with Mr. El-Erian in that I don't expect indications of QE in Bernanke's Jackson Hole speech, but I don't necessarily think that means he won't hint at other forms of easing, like stimulating lending. Moreover, it is possible that Bernanke will discuss pushing the forward guidance out further. Any move in this direction risks undermining the Chairman's credibility since a Romney Presidency means Bernanke would not be reappointed in 2014, thus any guidance beyond the end of Bernanke's current term is both hollow and misleading. Nevertheless, it is an option that has continuously been discussed by the FOMC.
Ultimately, regardless of what other direction he goes, I expect Bernanke to stop short of QE thereby disappointing markets during and immediately after his speech. However, in classic Fed speak, I expect Bernanke to provide investors just enough of a carrot for the market to rebound slightly before the close on Friday.