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Kass: Jackson Hole Expectations

This column originally appeared on Real Money Pro at 7:49 a.m. EDT on Aug 30.

NEW YORK ( Real Money) --
Participants discussed a number of policy tools that the Committee might employ if it decided to provide additional monetary accommodation to support a stronger economic recovery in a context of price stability. One of the policy options discussed was an extension of the period over which the Committee expected to maintain its target range for the federal funds rate at 0 to 1/4 percent. It was noted that such an extension might be particularly effective if done in conjunction with a statement indicating that a highly accommodative stance of monetary policy was likely to be maintained even as the recovery progressed. Given the uncertainty attending the economic outlook, a few participants questioned whether the conditionality of the forward guidance was sufficiently clear, and they suggested that the Committee should consider replacing the calendar date with guidance that was linked more directly to the economic factors that the Committee would consider in deciding to raise its target for the federal funds rate, or omit the forward guidance language entirely.

Participants also exchanged views on the likely benefits and costs of a new large-scale asset purchase program. Many participants expected that such a program could provide additional support for the economic recovery both by putting downward pressure on longer-term interest rates and by contributing to easier financial conditions more broadly. In addition, some participants noted that a new program might boost business and consumer confidence and reinforce the Committee's commitment to making sustained progress toward its mandated objectives. Participants also discussed the merits of purchases of Treasury securities relative to agency MBS. However, others questioned the possible efficacy of such a program under present circumstances, and a couple suggested that the effects on economic activity might be transitory. In reviewing the costs that such a program might entail, some participants expressed concerns about the effects of additional asset purchases on trading conditions in markets related to Treasury securities and agency MBS, but others agreed with the staff's analysis showing substantial capacity for additional purchases without disrupting market functioning. Several worried that additional purchases might alter the process of normalizing the Federal Reserve's balance sheet when the time came to begin removing accommodation. A few participants were concerned that an extended period of accommodation or an additional large-scale asset purchase program could increase the risks to financial stability or lead to a rise in longer-term inflation expectations. Many participants indicated that any new purchase program should be sufficiently flexible to allow adjustments, as needed, in response to economic developments or to changes in the Committee's assessment of the efficacy and costs of the program.

-- Minutes of the Federal Open Market Committee (July 31-Aug. 1, 2012)

The FOMC minutes released this week embody what is likely going to be Ben Bernanke's message on Friday at Jackson Hole.

And that is very little.

The Fed should not be expected to (and will not likely) announce a new quantitative-easing program tomorrow.

Jackson Hole's Four D's

What the Fed chairman should be expected to do:

  1. Deliver and reiterate the conclusions discussed in the aforementioned FOMC minutes (see above).
  2. Detail available options left with regard to easing monetary conditions further.
  3. Defend the success of QE1 , QE2, Operation Twist and the extension of Operation Twist.
  4. Discuss the deficit and fiscal issues (and the importance for politicians to quickly address these headwinds).

This outcome is generally in line with consensus expectations.

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