The Jackson Hole policy void: James Saft

August 22, 2013

Aug 22 (Reuters) – The risk in all transitions is a
destabilizing void, and at this year’s Jackson Hole Federal
Reserve conference a policy void is leading the agenda.

Despite this being the eve of what may be the most important
rollback of monetary policy ever, Ben Bernanke has passed on the
chance to make a valedictory address. This marks first time a
sitting Federal Reserve chairman has missed the event since
1987, when Alan Greenspan stayed home just days after being
confirmed by Congress for the job.

The event, organized annually by the Kansas City Fed at the
mountain resort in Wyoming, has long been not just a place to
exchange ideas but the backdrop for preparing the markets and
investors for important changes in policy.

This year, not so much. Besides Bernanke, Mario Draghi of
the European Central Bank won’t be there. Nor will Mark Carney,
newly installed at the Bank of England.

Larry Summers, widely seen as the front-runner to replace
Bernanke when he leaves office at the end of January, is also
elsewhere engaged. Only three of the seven members of the Fed
board of governors are coming.

Do you get the feeling that central bankers would rather not
talk just now about how policy is going and what they plan to do
next? That in itself is unsettling, especially given the two
huge transitions we may shortly face: from bond buying to less
bond buying and from Bernanke to whoever comes next.

Janet Yellen, Summers’ main rival for the job, will be
there, which given that the cool kids are staying home may tell
you as much about her chances as the fact that the list of White
House interns this summer includes one Harry Summers, son of
Larry.

I suppose it is possible that Bernanke, or even Summers,
surprises us all, perhaps by parachuting, James Bond-style, from
a helicopter Friday morning to unveil QE 2.95. But let’s not
count on it.

And while the Bank of Japan’s Haruhiko Kuroda and Charles
Bean from the Bank of England will be there, the fact remains
that though there are pressing questions about monetary policy
in both countries, the real action is going to come out of the
United States.

We will very likely end the weekend having considered a
series of interesting ideas, but fundamentally none the wiser
about the big questions.

MINUTE WALTZ

In some ways it is understandable that policymakers are
shying away from a public exchange of views. There is remarkably
little consensus about the economy, financial markets or how
best to calibrate policy to best influence them.

The markets came away from the Wednesday release of the Fed
minutes from their last meeting in July with the impression that
September would be the month when the central bank begins to
shave back its bond purchases. Both bonds and stocks fell after
the release, though not nearly as much as they will if it
actually happens.

The minutes show agreement that tapering would be right “if
economic conditions improved broadly as expected.” Just about
now, however, with the exception of an improving unemployment
rate, economic conditions can’t be construed as strong. Indeed,
they are a bit weaker than the Fed has been forecasting.

There are very good reasons to start tapering simply because
our understanding of the benefits and risks of bond buying is so
limited. That, however, is not a paper we can expect to be
delivered in the mountains this weekend.

There is, quite simply, lots of disagreement. One member of
the FOMC dissented and called for a more explicit commitment to
taper soon. But “a few” members urged patience and the need to
evaluate more data as it comes through.

As well, “a number” expect second-half growth to disappoint,
which surely must argue for holding back on the taper.

At this point, it is hard to know what to expect. The Fed
might well taper in September just to show that it can, or it
might decide to sit the whole thing out and leave it in the lap
of the new chief, whoever that person is and whenever they are
approved.

In some ways, the chances of a slow or uncertain approval
process might argue for doing a little now, just to take the
drama off of the table. The problem with that is that markets
may react so severely to the taper, in the U.S. and elsewhere,
as to force the Fed to somehow hose investors down.

Perhaps Wednesday’s selloff can best be seen as a reaction
to that old bugbear uncertainty.

Don’t expect the Jackson Hole conference to provide any
help.

(At the time of publication, James Saft did not own any
direct investments in securities mentioned in this article. He
may be an owner indirectly as an investor in a fund. You can
email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(Editing by Douglas Royalty)

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