There is some talk of 'Operation Twist' which would technically not be an expansion of the balance sheet - and hence not a QE - in that the Fed would buy long term Treasuries but offset that buying 1:1 by selling short term Treasuries. This would raise near term rates, and lower long term rates - I guess in the belief if 4.1% thirty year mortgages can't goose the housing market, maybe 3.7% will. It's all a bit surreal because I remember typing on these virtual pages in 2008 that Bernanke would one day be so desperate we'd get 30 years mortgages in the 3%'s. We're not far off.
Some excerpts from Hilsenrath:
- A few months ago, Mr. Bernanke and his Fed colleagues were hoping the economy was on solid footing and could heal without more support from the central bank. Instead, economic growth has disappointed, the Fed has opened the door to new easing measures, markets have gone haywire, and Mr. Bernanke has once again become a lightning rod for politicians. The economy is his dark, inescapable underworld. Jackson Hole is where he finds himself every turbulent August, plotting next steps.
- The Fed chairman's first challenge on Friday will be to explain the central bank's changing narrative for the economy. Before the Aug. 9 policy meeting, Fed officials' public forecast, made in June, was markedly more optimistic than the latest private forecasts. Fed officials said the economy would grow by 2.8% in 2011; private forecasters in August were saying 1.6%. For 2012, Fed officials forecast growth of 3.5%; private analysts, 2.5%. The Fed has signaled the forecast is now considerably lower.
- For months, Fed officials largely dismissed the economy's poor performance as a transitory reaction to Japan's natural disaster and oil-price increases driven by Middle East turmoil. Officials expected the powerful forces that since World War II have tended to bring the U.S. economy back from recession—self-sustaining cycles of improved confidence, hiring and spending—to win out over temporary bumps as the year proceeded.
- The new, emerging narrative is that stiffer headwinds could restrain the U.S. recovery for longer than hoped—perhaps not enough to send it back into recession, but enough to keep growth painfully slow. Fiscal policy, for example, could be a drag on growth for years. Housing isn't coming back quickly. Households are still trying to rid themselves of debt, and their wealth has eroded.
- The deteriorating forecast is the main reason the Fed decided earlier to make a conditional commitment to keep short-term interest rates near zero through mid-2013. Expressing doubt that the economy will get much stronger between now and then is hardly likely to inspire much confidence, but at least it will keep financial conditions easy.
- Economic theory, always important to Mr. Bernanke, a former Princeton professor, was at play. Theorists Mr. Bernanke follows have argued for years that long-term commitments to keep rates low are primary weapons central bankers should use to fight the kind of malaise that has plagued Japan since the 1990s.
- There are other small steps he might take—such as reducing the 0.25% interest rate that the Fed pays banks that keep money on reserve with it. The thinking: Why reward banks for not lending? Or the Fed might tweak the composition of its securities portfolio to aim at reducing long-term interest rates further. (that would be Operation Twist)
- .....another obstacle is the risk that inflation doesn't retreat as the Fed expects, or rises, which could force it to raise interest rates sooner than promised, damaging its credibility.
- Mr. Bernanke correctly predicted that commodities prices would retreat from highs earlier this year. Yet underlying inflation outside of commodities has advanced more than expected, a surprise to some at the Fed given the economy's weakness. They expect it to retreat, too. But is it possible that even small periods of growth in this debilitated U.S. economy or pressures from overseas prices or a weak dollar could cause an oversize rise in prices?
- The nagging worry that inflation might take root, despite the weak economy, is one reason why Mr. Bernanke and his colleagues might choose a cautious path in the months ahead.
And in the closing line perhaps we have the message Ben wanted to send the markets:
- At Jackson Hole last August, Mr. Bernanke heralded a second round of bond-buying aimed at propelling the economy known as quantitative easing, or QE2. The Fed's recent declaration that it's prepared to take other measures to promote the recovery clearly opened the door to QE3. But don't expect the Fed chairman to rush through that door on Friday.