Expect More Lip Service From Bernanke at Jackson Hole

Pinnacle Digest writes: In Axel Merk’s latest article he explains that Bernanke has been pondering whether to print or not to print when writing his upcoming Jackson Hole speech. According to Merk, the likelihood of further QE being announced after the Fed’s meeting in Jackson Hole seems quite unlikely – and we have to agree. With that stated, just because the Fed may not announce further QE doesn’t mean it won’t shake up the market and try to turn investor sentiment positive.


Aside from the laundry list of reasons why Bernanke won’t announce further QE this week (according to Merk), we believe the close timing of the meeting in relation to the US election makes it too politicized. However, aside from the politics and poor timing during an election year, the threat of deflation is far too great for Bernanke not to do anything. And we’ve always said here at Pinnacle that the Fed’s only option over the long-term is to inflate the US out of debt. After all, a prolonged deflationary environment would likely bankrupt the country.


 Merk stated that “We are faced with the same challenge today: if monetary accommodation were removed at this stage (interest rates raised, liquidity mopped up), there’s a risk that the economy plunges right back down into recession, if not a deflationary spiral. As such, when Bernanke claimed the Fed could raise rates in 15 minutes, we think it is a mere theoretical possibility. In fact, we believe that the framework in which the Fed is thinking, it must err on the side of inflation.”


The Fed is in a very precarious situation. Let’s assume another round of QE is not on the table this month; that leaves limited options for the Fed to keep investors from fleeing the market. However, as Merk explains, the Fed has already told us what its strategies are when it comes to keeping investors and the economy on the right track.


Merk stated that the three manipulative tactics the Fed can use are:
•    To expand the Fed’s holdings of longer-term securities
•    To ease financial conditions through communications
•    To lower the interest rate the Fed pays on bank reserves to possibly 10 basis points or zero.


Merk goes on to note that “We have not seen the third option implemented, but the Fed might be discouraged from the experience at the European Central Bank: cutting rates too close to zero might discourage intra-bank lending and cause havoc in the money markets.”


Given our belief the Fed will not add liquidity next month, we expect more lip service from Bernanke as he tries to reassure markets ( to ease financial conditions through communications - as Axel Merk highlighted). Bernanke wants us all to believe that if need be, he could add liquidity, keep interest rates low indefinitely or possibly even buy toxic real estate assets.


Click here to read Axel Merk’s detailed analyses on what to expect from Bernanke’s speech in Jackson Hole.