Ever since the Minutes of the August 1 FOMC meeting surprised by its very dovish tone, market’s attention is firmly on Fed chairman Bernanke’s speech at the Jackson Hole symposium. Will the chairman cross the Rubicon and announce a further easing of policy, most likely in the form of another large scale asset purchasing programme?
It was the following very strong worded sentence in the August FOMC Minutes that revived monetary easing hopes: “ Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of recovery”. The latest payrolls numbers were better and the July retail sales were strong too, but that seems still insufficient to satisfy the above mentioned conditions of “...pointing to substantial and sustainable strengthening”. So the door to additional accommodation remains wide open and we think chances are more than even that policy will be eased in September, likely, but not inevitably via QE-3. The eventual Q3 programme will most likely be open-ended, meaning that neither an amount nor an end date will be fixed, giving the Fed maximum flexibility.
Nevertheless, we don’t expect Bernanke to convey his policy intentions today for various reasons. First, at the August 1 meeting, the FOMC Committee wanted more information on the economy. It did get one monthly batch of eco data, who were somewhat better, but that isn’t enough to have erased uncertainties about the eco outlook. At the September 13 meeting, there will be some more key economic reports available (Payrolls, ISM...). Second, Bernanke is a team player and out of respect for his colleagues such an important decision, for which there is no strong time constraint, should be taken during the FOMC meeting. Our main scenario is for Bernanke to keep the door open for more easing, but without going further than the FOMC Minutes. If we would be wrong, it is more likely that he suggests the FOMC will ease further than that he closes the door definitely for such an easing.
Regarding the market reaction, at the start of the week, it seemed that many were expecting Bernanke would signal a further accommodation of policy, now the balance of opinion may be more even-handed. Nevertheless, when he would stick to the message from the August FOMC Minutes , there may be some disappointment. It would be intrinsically negative for Treasuries, but as it would lead to some risk-off selling of equities, the losses for Treasuries would be subdued. If he would firmly signal more easing, that would be positive for riskier assets like equities, while it would be neutral to slightly positive for Treasuries. In the unlikely case he would shut the door of more easing, a sharp sell-off in riskier assets will take place, which might contain the losses for Treasuries.