Voodoo Fed – Bernanke was standing next to the mountains.

Meanwhile back in the Grand Tetons, Fed Chairman Bernanke gave his long awaited speech on the economy and Fed policy. Mr. Bernanke stated that further policy accommodation remains a possibility as lackluster growth and high unemployment remain a “grave concern.” He mentioned that there has been little improvement to unemployment since January and told the audience: “Unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time.” Mr. Bernanke stated that the problems facing the economy were largely cyclical and then described several structural causes for the tepid recovery. He finished his speech with oft-stated promise: “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” This has led many market participants, including fixed income media darling, Bill Gross, to opine that not only is QE3 likely, it is imminent. We all due apologies to the intrepid Mr. Gross, we do not believe that Mr. Bernanke was telling that markets that QE3 at the next meeting was a done deal. For one thing, we have employment data due out next Friday. Secondly, if he fires off all of his bullets now, what will he do when and if the U.S. economy falls off of the “Fiscal Cliff” in January? Barring terrible employment data (unemployment rate at 8.3 or higher and/or Nonfarm Payrolls below 100,000), we believe that the most aggressive actions we could see from the Fed at its two-day meeting, schedule for 9/12 and 9/13, are an extension of the policy accommodation timeline into 2013 and/or a lowering of the Fed deposit rate. The Fed has its final meeting of 2012 on December 12th. Unless conditions worsen before then, we believe that the Fed will hold off until after the election to implement QE3. This would avoid a politicizing of the Fed and give Fed officials a better feel if our elected officials will permit the economy from plunging into the fiscal abyss.