Jackson Hole cliffhanger

A key conclusion in all academic papers on QE and similar measures is that the major impact from policy changes comes from the announcement rather than the implementation. A Bank of England paper shows that the UK's QE announcement in itself was 75 percent of the actual impact on rates.

This Fed and other central banks have been using this knowledge with maximum leverage, and politicians have as well, to some extent: announce your intent or ability to do something and it will force the market to follow your lead.

This is exactly what we got from Bernanke today at Jackson Hole. He failed to deliver new news, but upped his dovishness slightly, increasing the odds that our one-two punch scenario: a slight disappointment now and in September and then full turbo on QE later.

Let's look at what we got:

• QE: Bernanke has never been one to turn down an opportunity to ease. No surprises here.
• Unemployment is the main concern, underlining our theory that the dual mandate in reality has mostly become a single mandate to spark job creation.
• Fiscal cliff: He is concerned, but doesn't seem willing to wait and see what happens, which may end up costing him in terms of longer term growth (due to less political incentive to reform near term)
• Extension of expected horizon of zero rates: no mention of whether the horizon for zero rates will be extended through 2015 from the current 2014, but this probably remains the main change at September FOMC.
• A defense of QE as a successful policy for the economy and for lowering rates while still seeing higher barriers for a QE3 but also categorically saying the risk could be worth taking

Ergo, this was a classic cliffhanger: keep the expectations high but deliver nothing of substance. Now the market will be data driven into the FOMC and the focus is back at Europe, where the Spanish region of Catalonia just got reduced to junk status, a timely reminder of Greece two years ago. The surprise now from the US will for the FOMC to change very little or nothing in September.