Evercore Pan Asset

A year ago news came out from Jackson Hole, Wyoming, that the Fed might print some more dollars. QE 2, the second burst of bond buying by the central bank, was eagerly anticipated. Markets hoped it would lift output and jobs.  It did serve to assist a rise in stock prices and some temporary lift to the confidence of the forecasters and soothsayers.

This year Mr Bernanke, the Chairman of the Fed, has to make another speech from Wyoming. QE 2 has ended. The gloom has returned.  Analysts have been busily scaling back their growth forecasts for the US. The dollar is down by a bit more than a tenth against other currencies. That means it is easier to export, but dearer to import. US inflation is up a bit. Commodity prices rose over the previous year. Some say the printed dollars had something to do with that.

It appears that Mr Bernanke has few options. He has already told a surprised world that he plans to keep interest rates down at their record low levels for another couple of years. His Republican critics are angry that savers will get such a poor deal. They are keen that he should rule out any more quantitative easing. They see money printing as an immoral attempt to inflate out of the debts, a means of mugging savers, and a cause for delay in the necessary task of cutting public spending.

It’s not just the tea party movement who think more money printing could be bad. There are others, less ideologically opposed to deficit spending and a larger public sector, who think the US may have reached the point where more QE will do no good. They are afraid that it leaches into overseas markets and into inflationary rises in commodities. If the US is not careful what it gains from more money in circulation it loses from more imported inflation. 

The Republicans are not Mr Bernanke’s immediate problem. Pressing harder on his collar will be the present Obama administration.  Thwarted in their wish to borrow more money for an additional fiscal stimulus, they may well be keen to see more monetary action to give the weakened economy another push.

This leads to various discussions. Can the Fed spend the interest on the bonds they hold on buying more? Should they buy longer dated bonds, paying for them by selling shorter dated? Might this cut the interest rates on mortgage lending and give some succour to a damaged housing sector? Should they cut interest on bank deposits with the Fed even more?

I would expect the news from Jackson Hole to be nuanced. I would expect a bit more than just the reaffirmation of low interest rates in our time. There may be tunes to be played within the current portfolio of bonds. I would also expect Mr Bernanke to leave open the possibility of a QE3, without specifying when and how much.

He is sufficient of a politician to know it is better to travel than arrive, and that some in the markets rest their hopes on another injection of central bank cash. He is sufficient of an economist to know that QE 2 brought diminishing returns. QE 3 is no longer a slam dunk certainty. It may be better when in a Hole to stop printing, but that may not be a popular enough message when a President is fighting for re-election. Do not expect the word from Wyoming to resolve the problems, or guarantee market strength from here. Expect this argument to run and run.