As most of you know by now, Fed Chairman Bernanke used the Federal Reserve Bank of KC Economic Symposium in Jackson Hole WY in August of last year to set the table for what we now know as QE2. This year’s conference was expected by some to be a repeat of last year, but this time around the Chairman decided to leave the QE train in the station, for now at least.

The Chairman sighted nothing new in his comments on the disappointing growth in the first half, conceding that only some of it can be blamed on temporary factors such as the disaster in Japan.  The Chairman spent a great deal of time detailing how housing, a major part of a typical recovery cycle, is still weak and showing no sign of recovering in the near term. Tight credit, household deleveraging, high levels of long term unemployment, and cost pressures from higher commodity prices were all causes of weakness sighted in the speech.

Although the Federal Reserve has lowered their expectations for growth in the second half and beyond, they still expect the second half to be considerably stronger than the first. Since the wind down of QE2 the Fed has been claiming conditions would need to deteriorate further to justify additional stimulus, a position that the Chairman did not reiterate in this speech. Instead he chose to say “The Federal Reserve has a range of tools that could be used to provide additional monetary stimulus.” Adjusting the period of low rates from “extended period” to mid 2013 last FOMC meeting was in a way stimulus because it moved markets in a big way, but QE is still the focus of Fed watchers right now.

The biggest surprise that came from the speech was the extension of next month’s FOMC meeting from a one day meeting to a two day meeting to “Allow further discussion of tools.” That may get people wondering about further Fed stimulus in the context of the data between now and then including Friday’s payroll data.

Maybe the speech was less exciting than some people thought it was going to be, but in my mind it was far from a nonevent. Before the next FOMC meeting we will get a clearer picture of the President’s jobs plan that he will present after he returns from vacation. Bernanke’s comments on the nation’s fiscal state and the extension of the Sept 20 FOMC meeting could end up setting the stage for further stimulus yet.

Have a great weekend. 

Cliff J. Reynolds Jr., Investment Analyst