Run, Pass or Punt?

August 20, 2012 BY GIL BAUMGARTEN

The annual Jackson Hole Economic Summit will begin next week, starting on Thursday, August 30th running through September 1st. Fed Chairman, Ben Bernanke, will give his remarks at 10AM on Friday the 31st. Much hinges on his comments, as the financial world will tune in to get a glimpse of his thoughts regarding Fed perspective and initiatives, as well as possible future economic policy in the US.

Over the years, the Federal Reserve has become an increasingly political machine. The no-replacement job security of the Fed Chairman is supposed to insulate him from political pressure, but we all know empirically that it doesn’t appear to work that way. In my estimation, he will try to paint as rosy a picture as possible without appearing dangerously out of touch with reality. He will want to appear in control, and effective in his past policy efforts. So there should be a fair amount of self-justification, as anyone in his situation would do. Given the economic languishing we all see, he should argue that we are on the right path, we have made all the right moves, and we simply need more time. He should make an argument for greater quantitative easing, but should stop short of recommending any robust intervention. This would communicate that we are dangerously close to tipping back into recession, and risks the “fear we have is fear itself” argument. Additionally, the rising influence of the Tea Party movement should not be under-estimated, especially given recent election turn of events. The Tea Partiers would rail at the thought of more deficit spending, and it’s hard to argue with their logic (a bigger shovel is never a way out of your current hole).

So here is what I expect:

Mr. Bernanke’s comments could go some combination of three ways: run, pass, or punt.

By these choices I see:

Run

Everything is “running” just fine. The rest of the world has problems, but we are much better off. Stand pat, and let time work it out.

Pass

Everything is generally fine, and we will “pass” on monetary stimulus, but we will extend our bond buying (QE3) to pressure interest rates lower. Not because it’s required, but just as a safety measure.

Punt

The world is a scary place, and everyone else’s problems will infect us too. It has little to do with the choices we have made, but is the scenario painted for us by the brush of others. We must “punt” to avoid further problems, so monetary stimulus (printing money or currency devaluation, you pick) is required.

Of course, the significance of this is that it could indicate the direction of interest rates and the stock market. I would be very surprised at the candor required to discuss much punting. We’ll see.