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It’s that time of year again…

Already the market is on tenterhooks waiting for Gentle Ben Bernanke to chopper into Jackson Hole to deliver his annual state of the Fed address. It was at Jackson Hole last year where Bernanke laid the groundwork for what eventually became QE2 in early November of last year.

He’s been dealt a more difficult hand this year. He’s already “spent” (created) $600 bln in additional quantitative ease over the last year, bring the Fed’s balance sheet within shouting distance of $2 trln, with very little to show for it. Dipping his ladle in the same old well is unlikely to yield materially different results this time around, if you ask me.

He’s already used one of the tools he outlined before Congress about a month ago.

One option would be to provide more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels. Another approach would be to initiate more securities purchases or to increase the average maturity of our holdings. The Federal Reserve could also reduce the 25 basis point rate of interest it pays to banks on their reserves, thereby putting downward pressure on short-term rates more generally.

At Jackson Hole, the market will be attuned for anything but QE3. With headline inflation above the Fed’s target and core inflation getting close, even Bernanke will be reluctant to buy more bonds.