Bernanke on the Economy

Big day today as all eyes are on Fed President Bernanke’s speech in Jackson Hole, WY. There is speculation that Bernanke could announce a “QE3” strategy or what some call “Operation Twist”. Under this potential scenario, the Federal Reserve would extend the duration of its balance sheet by selling assets maturing in short term and buying longer term securities. In theory, this would put downward pressure on rates prompting investors and asset managers to look for higher yielding assets. Nevertheless, investors may be setting themselves up for disappointment as traditionally the Kansas City Fed’s annual economic conference has not been the place to unveil major monetary policy.

Update: As expected, Bernanke does not mention any new strategies for the Fed other than they are prepared to use additional tools if necessary. That being said, he does have strong words for changes in fiscal policy (government action):

• He mentions that the drama seen in the past few months on the debt ceiling in fact hurt the economy and companies/other countries’ confidence in future economic outlook.
• Challenges congress to change the budget process to prevent this from happening again.
• Reiterates the need for long term budget balancing ALONG with more short term stimulus as the economic growth is more fragile than previously anticipated. This is an idea that seems to be DOA as the conservative congress is unlikely to support anything other than further budget cuts.

Have a great weekend!

Rod