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Jackson Hole

Waiting for GDP and Jackson Hole
In the past few days markets have stumbled out of a fear gauntlet. We have just been through one heck of a rough a summer and are now bracing for a hurricane. Irene, not Bernanke, lies behind the hurricane reference. European and American sovereign credit has taken a symbolic and accreditation beating. The Euro Zone is straining under debt burdens and a virally spreading lack of confidence. We have serious confidence issues on our side of the Atlantic too. Bank of America is paying 6% for the confidence of association with Warren Buffett these days. Amidst all this tumult we will hear from Federal Reserve Governor Bernanke and see revised GDP today.
We expect very little from the 10AM Jackson Hole speech. Folks seem to have forgotten that it is not the norm to announce major new policy initiatives from the Kansas City Fed’s retreat. We will get general language about commitments and reads on the US and World Economy. If the markets swoon and reaction is swift and harsh to a lack of concrete proposal, we might see a response later next week. This would be the earliest and would only occur if there is a dramatic and negative response.
We are likely to see Bernanke speak about the temporary nature of our recent spike in inflation readings. We have seen a significant increase in price growth since last year’s summer weakness inspired QE2. We have CPI year over year increase of 3.6%. That is much higher than last year’s modest 1.3% reading going into the Jackson Hole meeting. As prices have come up, led by rapid increases in the prices of food and fuel, pressure has risen on loose monetary policy. We see this as three very loud voices of dissent were raised against the recent Bernanke assurance of low rates through 2013. Indeed, the spike in prices has been sharp and will likely come down. However, it reduces the likelihood of aggressive policy. The political opposition is high and the economic rationale is diluted by past stimuli.
We do hope to hear significant attention paid to the balance between recession and inflation risk. This will open the way to greater policy freedom going forward. We also hope and expect a lengthy discussion of working with the ECB, BOJ and beyond. Tough times and jittery markets are in dire need for the calming influence of sage leadership policy. Regulators and banks need to invest in reassurance. Bernanke could provide some balm to market wounds today if he addresses Fed commitments to European banks and concerted policy actions.
Finally, today’s expected corporate profits and GDP revisions are likely to show another quarter of strong profits and lackluster GDP. We have seen this pattern define the last 2 years. We need to see higher GDP to be able to sustainably anticipate good corporate profit numbers.