Don’t get Your Hopes up for Jackson Hole

By TJ Kim, Bondsquawk

The Federal Reserve’s annual symposium at Jackson Hole is only a few days away. Despite some investors’ expectation on new stimulus that might be hinted at the meeting, the situation now seems more likely that Chairman Ben Bernanke may not signal or announce any definitive plan. Especially with some signs of a rebound in the economy and thus reducing the urgency of another round of Quantitative Easing, the Fed may take more time to  reassess the economy before drawing up any stimulus package.

While it is hard to figure out what will be announced at the symposium, it will be helpful to understand what the focus of discussion was at last month’s FOMC meeting.

The underlying theme at the meeting was “mixed signs in the economy.” While the GDP is indeed growing, there are no vibrant industrial and commercial activities at the moment. Consumer Sentiment has improved with some indications from the recent rebound in the housing sector. On the contrary, due to the tight credit rules for loans, the private sector is not well positioned to fund investment and consumption while savings at the banks are piling up. So it is ambiguous where the growth is heading. Economics Research team from Credit Suisse wrote in their recent report,

“…may not show enough improvement to satisfy the “many” FOMC members who on August 1 “judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

“After a $1.3bn slip in the latest week, commercial & industrial loans are growing 13.4% yoy, their slowest pace since late May. At $1.5tr, the level of C&I loans is some 9% below its 2008 peak, when firms frozen out of primary markets tapped contingent credit lines. Real estate lending has been considerably more sluggish. Real estate loans held by banks dropped $14.7bn (+0.7% yoy) to their lowest level since late January. The weakness was concentrated in residential loans (-$12.5bn). Consumer loans fell $0.7bn (+2.2% yoy).”

In terms of the Federal Reserve Balance Sheet, the Fed has reduced its balance sheet, having sold off most of the assets that it bought to provide liquidity to corporations during the financial crisis. This hopefully means that companies have become more financial sound since the crisis.

“The Fed has been selling off assets from its three Maiden Lane portfolios, which it acquired during emergency operations in 2008 related to Bear Stearns and AIG. At year-end 2008, Maiden Lane assets totaled $73.9bn; on August 22 the total was $3.5bn. On August 23 the New York Fed announced the sale of the remaining securities in Maiden Lane III. This follows the wind-down of Maiden Lane II in February 2012 and the January 2011 termination of the New York Fed’s extension of credit to AIG. The total net profit to taxpayers from the Fed’s assistance to AIG and AIG-related facilities was $17.7bn.”

The most recent Beige Book which contains the Fed’s conversation with businesses, noted the following,

“…overall economic activity continued to expand at a modest to moderate pace.” This was a slight downgrade from the “moderate pace” language in the June 6 report.

Over the past few weeks, the tone of the domestic economic data has brightened somewhat, perhaps enough to upgrade the characterization of US growth back to “moderate.”

The next Beige Book will be release on August 29^th, and it will be an important reference during the FOMC’s meeting next month.

With two objectives, price stability and revival in employment, the Fed will decide whether there is a need for an additional large asset purchase program. As mentioned in the meeting, the key point is to keep the monetary policy rules simple and to find the best measure that would keep the long-term interest rate tame while stimulating commercial and industrial activities to boost employment once again. As of now, however, we need to wait and see if the recent rebounds in housing and automotive will remain steady, possibly providing confidence in other sectors as well.

BondSquawk

BondSquawk is written by a team of bond market experts whose aim is to provide an unbiased view of one of the largest (but under reported asset classes in the world) – The world of bonds.

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