This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

What to Expect From Jackson Hole: 'Party On'

NEW YORK (TheStreet) -- In the past, the Federal Reserve's Jackson Hole Symposium produced some new and controversial proposals. Two years ago, for example, then-Fed Chairman Ben Bernanke introduced QE3--and the financial markets loved it. So what can we expect from this year's symposium?

Read More: 7 Stocks Warren Buffett Is Selling in 2014

Given the stances that Janet Yellen has taken throughout her short tenure as chairwoman, it would be very surprising if she didn't use Friday's speech to justify continued zero interest rate policies (ZIRP) and insist that the Fed's monetary policy tools aren't for market stabilization (i.e., "macroprudential" policies are for that). Let's look at the evidence.

The BIS

At the end of June, the Bank for International Settlements (BIS), the central bank for central bankers, put out a report saying that the world's leading central banks should not fall into the trap of raising rates "too slowly and too late," adding that "the risk of normalizing [interest rates] too late and too gradually should not be underestimated."

The Deal's Paula Schaap spoke with economist David Levy on what he thinks we're likely to hear from Fed Chair Janet Yellen:


WATCH: More market update videos on TheStreet TV

The BIS said governments should promote policies that boost their economies, like removing obstacles and rules regarding hiring and firing (e.g., Southern Europe) like Germany did some 20 years ago, structurally reform their tax codes (e.g., U.S.), strengthen the capital base of their banking system (e.g., Europe), and encourage capital formation.

Fed's Answer: "No Way"

A couple of days later, the BIS got its answer from the Fed, as Yellen distanced herself from all of these ideas. In a somewhat shocking statement, she said that the Fed's monetary policy tools--which include short-term rate setting and its balance sheet--were not intended to anticipate the risk of financial instability. Instead, the Fed could use its regulatory tools--rules on bank capital, derivatives and margins--to ensure the overall health of the financial system, a policy called "macroprudential." Later, in her semi-annual Humphrey-Hawkins testimony to Congress, she clarified the meaning of the term: regulators of the financial system are responsible for financial stability.

Macroprudential Policy

There are two critical issues here: 1) the Fed's monetary policy of financial repression (ZIRP) is actually causing financial risk because investors are stretching for yield in the junk bond market, which Yellen acknowledged to Congress appeared stretched, and 2) the Fed is still the primary regulator of financial institutions in the nation and is supposed to be the "lender of last resort," a function that is aimed at keeping markets and the economy "financially stable." So, we would expect that the Fed would use every tool in its toolkit--including monetary policy--to also fulfill its regulatory obligations.

Track Record on Bubbles

Since the Fed wants to rely on its regulatory--not monetary--powers to insure financial stability, let's look at the regulatory track record on bubbles. In early 2007, Bernanke, assured the public that the "the problems in the subprime market seem likely to be contained." At the time of those remarks, that bubble was already bursting and the primary regulator didn't see the devastating implications. Then, as it burst, it took the biggest dose of liquidity (via the Fed's balance sheet) the world had ever seen to keep the financial system from collapse.

Let's also recognize that the regulatory process is reactionary. Every single piece of major financial legislation--most recently Sarbanes-Oxley and Dodd-Frank--has been the result of some financial disaster, not in anticipation of it. The regulators simply aren't capable of stopping financial instability, either because they don't recognize it, or because they do not yet have the regulatory powers from Congress to prevent it.

So, Party-On

My expectation from Jackson Hole is that the Fed will confirm a continuation of ZIRP despite the misallocation of resources or the bubbles it causes. To justify a continuation of ZIRP, Yellen needs to reiterate her stance on "macroprudential" policy--that it is the function of the regulatory arm of the Fed and other agencies to prevent bubbles.

No one in the financial arena, including myself, actually believes that the Fed won't provide liquidity and do what it can with its balance sheet in the event of another financial implosion. I suspect the current Fed stance is there only as a continued justification of current policies, which are being questioned by more and more economists.

So, after Jackson Hole, the party in the financial markets is likely to continue awhile longer.

Read More: Warren Buffett's Top 10 Dividend Stocks

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,655.04 +298.17 1.72%
S&P 500 2,045.56 +32.67 1.62%
NASDAQ 4,725.8240 +81.5120 1.76%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs