The Unofficial Fed Policy Meeting

 | Aug 22, 2011 | 12:00 PM EDT  | Comments
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"The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do. The issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using each tool." – Fed Chairman Ben Bernanke

Those illustrious comments from Fed Chairman Bernanke at last year's unofficial Fed policy meeting may be heard again at this week's Jackson Hole symposium as a means to soften the market up for something firm on the unconventional policy front. The market is on pins and needles at present, following the return of whack-a-doo trading conditions, where tight correlations between equities have made stock-picking and bottom-calling exercises sucker's games. Market-goers are so desperately yearning to hear their bearded daddy signal the risk-reward of doing more quantitative easing that it has shifted to the point of calling into question the Fed's adherence to its dual mandate. In layman's terms, there is downside risk to price stability (deflation) and employment from the weakening economic outlook that is now starting to become self-reinforcing.

Either way, welcome to the "Twilight Zone," people -- the Jackson Hole episode is likely to be a true black-and-white classic. It spins a tale of an enormously important governing body with an absurd amount of unchecked power appearing to sweep in to save Mother Earth from the economic perils associated with see-sawing stock prices. Initially, the actions of the government work stupendously (stock prices rise, and rise, and rise). Upon further inspection the governing body planted alien eggs in the ground that were scheduled to hatch at a future date and run amok on the planet. The alien eggs in this particular episode is the pure unconventional nature of out of the box Fed efforts to juice risk assets, which in my opinion does more long-run harm than good. Milton Friedman would agree as well.

Not to sound like Ron Paul, but it's disturbing to watch a government entity with the power of the Fed holding this degree of sway over our economic fortunes. Is the Bernanke Fed a 12-member policy voting machine designed to recklessly boost stock prices to promote the wealth effect? It's madness.

If you think I am being dramatic, here is a recent comment below from Dennis Lockhart, who is the president of the Federal Reserve Bank of Atlanta. "I'm most concerned about the effect of the wild stock market on consumer spending. Volatility alone could have a negative impact on consumer psychology at a time of already weakening spending."

What the Market Wants

Comments along these lines would be welcome: "There is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability." This would be much stronger language than the slight hint given by the Federal Open Market Committee (FOMC) in its recent statement. I wonder if Bernanke even knows whether he will come to Jackson Hole guns blazing, instead having a few different speeches handy each of which is dependent on how the economic data this week unfolds. Eerily, we will receive another snapshot into GDP this week, similar to Jackson Hole 2010. (Some estimates are calling for $500 billion to $600 billion in additional bond buying.)

Jackson Hole: One Year Ago

Stocks initially reacted negatively to Bernanke's speech, but the Dow finished up close to 165 points on the session. This time around the market is digesting in a volatile manner issues that are worse than a year earlier -- but we were still AAA rated then, after all.

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