The Hole in the Wall Gang

The chatter is growing for another round of QE coming out of Jackson Hole. We see the annual Mountain Jam as an opportunity to reconcile the Fed's still buoyant growth forecast. The inflation pressure that the Fed recognized in earlier "post QE" statements is stickier with their optimistic growth call.

The Fed finds itself in an an unpleasant spot. Reduce the growth numbers and inflation pressure eases in the most socially costly way. Conversely, calls for more QE increase and bolster bets for higher prices. This is a negative feedback loop with little positive side effects. The problem will lead to frank talk of the risks but a "holding pattern" on action. The term structure has adjusted aggressively to the FOMC statement. Distortions in the 2 year note will be evident in the auction. A mind numbing debate on the IOER rate at 25bp will surely echo through the Tetons.

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