Nothing New from Bernanke

The much anticipated Bernanke speech in Jackson Hole is under-whelming. He did not break any new ground. While much of the recent history is re-hashed, the only forward looking guidance is to reaffirm the recent FOMC statement and boilerplate language about being prepared to deploy its range of tools as appropriate. He did not go into much detail about those tools. In this sense he was more revealing at his April press conference.

While the Fed has downgraded its economic assessment-with formal forecasts due in Nov to reflect this--it has not indicated a policy response, except to take the step of putting a time frame on "extended period". He has announced that the one-day FOMC meeting in Sept (20th) will be extended to a second day.

This will likely fuel speculation that the Fed may seek a consensus on its action, unlike this month's FOMC meeting. At the same time Bernanke's speech devoted much time to urging Washington to put the US on a sustainable fiscal path, when the economy was stronger.

It does seem in part that Bernanke may be indicating that monetary policy has largely done what is able to in these circumstances and now the ball ins in the government's court. Keep in mind that before the FOMC meets in September, Obama is expected to make an important economic speech that is anticipated to have additional measures to support the economy. The discussion has focused on three features: 1) extension payroll savings tax cut, 2) an public works/infrastructure bank--even if not a new WPA--and 3) mortgage relief through Fannie Mae and Freddie Mac.

The economic data in the coming weeks will also provide an important backdrop for the FOMC meeting. The Aug ISM reports, like recent survey data, is likely to be poor. The key report will be the jobs data. The headline may be depressed by the recent strike activity, but policy makers, even if not high frequency traders, will adjust for it.

If the FOMC does take new action next month, we suspect that the hawkish dissenters would find extending the maturities of its Treasury holdings may be among the least objectionable. Given the elevated price pressures, the bar to another round of asset purchases continues to seem high and would require an easing of this or a collapse of the US economy. Self-fulfilling survey data and a convincing break of the 1100 area in the S&P 500 would aggravate the pressure on the Fed to act.

Lastly, note that the Jackson Hole event is just starting. Trichet's speech this weekend may also provide fodder come Monday, when incidentally London markets are closed. The storm on the US East Coast may also contribute to challenging Monday.