Fed More Likely to Find Middle Ground and Extend

21

The highly anticipated Jackson Hole speech gave a little bit for everyone, and so could the next rate decision on September 13th. 

Ben Bernanke and his colleagues could opt for extending the guidance on keeping interest rates low from late 2014 to mid or late 2015. As long as Non-Farm Payrolls aren’t a total disaster, we can cling to two statements from Jackson Hole to lean towards this middle ground option.

Extending guidance would provide a compromise between the doves that want to print and the hawks that would prefer no action or even no guidance at all. This would also seem as the Fed is “doing something” to combat the “grave employment situation” as Bernanke stated, but without taking action in a controversial policy tool that has “diminishing returns” – also words of the Chairman.

Here is the relevant part from the Jackson Hole speech that can be seen as a hint to extending the guidance (emphasis mine):

Some of the policy rules informing the forward guidance relate policy interest rates to familiar determinants, such as inflation and the output gap. But a number of considerations also argue for planning to keep rates low for a longer time than implied by policy rules developed during more normal periods. These considerations include the need to take out insurance against the realization of downside risks, which are particularly difficult to manage when rates are close to their effective lower bound; the possibility that, because of various unusual headwinds slowing the recovery, the economy needs more policy support than usual at this stage of the cycle; and the need to compensate for limits to policy accommodation resulting from the lower bound on rates.

Ben Bernanke uses vague language, but here are some clearer words about this possibility. A dovish member of the FOMC, John Williams, also said:

“I don’t personally think that we would be raising rates until probably sometime in mid-2015 …

my own view is that I would be willing to communicate out further.

Economic indicators have improved in August after deteriorating beforehand. The picture isn’t rosy, but with a recovering housing sector, stability in jobs and even some better signs from the weaker link, manufacturing, it’s hard to see the Fed launch a big move such as QE3.

No QE3 on September 13th could boost the dollar.

Also David Song of DailyFx says that Without an immediate Recession Threat, QE3 Hints are Unlikely

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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

21 Comments

  1. Rates will definitely be extended, things are looking good, but not that good

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