Previewing Fed Meeting & Jackson Hole

In one more day we will have another Fed meeting and in about a month we will the (in)famous Jackson Hole annual gathering.  What can we expect from each event?

From some of Bernanke's past speeches, we can see that he has laid out a game plan for what he intends to do.  Below you can see a bullet point list of the main tools Bernanke has laid out in his 2002 Deflation speech (where he earned the nickname 'Helicopter Ben') and his 2010 speech at Jackson Hole.  From his 2002 speech, we can cross off items one through four on the list seeing as how each have been done in some capacity already.  From Bernanke's 2010 speech we can cross off items one and two as having already been completed.  There has been some chatter in the media about the Fed enacting point 3 to reduce interest earned on excess reserves (IOER), but I doubt this will happen on Wednesday's meeting.

Wednesday's Fed meeting will most likely have the same tone that the last few statements had (ie: slower growth, housing market doing okay, employment painfully slow, and the longer term inflation outlook in check).  If there is a change at this meeting, they will lengthen the time in which the Fed expects to keep rates low (right now it the language has it low till late 2014).  If we have anything more announced at this meeting I'd be quite surprised.

As far as the Jackson Hole event, we may see some new policy tools put into play depending on how the market has acted up to that point.  If the market keeps chugging along then Bernanke will see no need to enact extraordinary policy responses.  For now he will be content on having a bazooka in his pocket and reiterating the point that he is not afraid to us it.  We all remember how well that worked out for Paulson.  Granted, we are not in an all-out panic mode, but we could we approaching that point rather quickly.

Bernanke’s Game Plan (2002 Deflation Speech):

1. Traditional monetary policy (decreasing short-term rates)
2. Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys
3. A commitment to keep short-term rates at zero for some time OR have the Fed announce explicit ceilings on longer-maturity Treasury debt (say, bonds maturing within the next two years)
4. Operate in the markets for agency debt
5. Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed as collateral.
6. Have the Treasury issue debt to purchase private assets and the Fed purchase an equal amount of Treasury debt with newly created money. 

Bernanke’s Game Plan (2010 Jackson Hole Speech):

1. Conduct additional purchases of longer-term securities
2. Modify the committee’s communications
3. Reduce the interest paid on excess reserves
4. Have the FOMC increase its inflation goals (not widely accepted)