Jackson Hole, Central Bankers and the USD

Every year the world’s central bankers meet in the ritzy, exclusive mountain resort town of Jackson Hole, Wyoming for the Kansas City Federal Reserve Bank’s Annual Economic Symposium. They discuss current policy, present papers and try to find solutions to pressing issues.

This meeting has been conducted since 1978 with last year’s topic presciently focusing on housing, housing finance and monetary policy. This year the topic was “Maintaining Stability in a Changing Financial System”. All eyes were on U.S. Federal Reserve Chief, Ben Bernanke as he gave his talk at 10:30 am EST.

He began with dire words, stating the financial storm has reached gale force; inflation is jumping, and the commodity boom combine to make the current economic environment one of the most challenging in memory. He further expounded that the Federal Reserve has attacked the financial storm in a 3 prong advance, consisting of the easing of monetary policy, offering liquidity support via collateralized lending programs and lastly initiating a range of activities developing their role as financial regulators and supervisors.

Most importantly, in regards directly to the U.S. Dollar, Bernanke stated “We will continue to review ALL of our liquidity facilities to determine if they are having their intended effects or require modification”. He further went on to defend the Federal Reserve’s role in facilitating JP Morgan’s assumption of Bear Stern’s obligations This situation led Bernanke to believe that the best way to protect the financial system is to strengthen the infrastructure’s “hardware and software”. He prudently expects cooperation between the public and private sectors to accomplish this goal.

Positive words were also said by the Fed Chief, primarily “A recovery in the Dollar and declines in commodity prices should lead inflations to moderate”. He also stated that interest rates were “relatively low” in light of the current financial pressures. This leaves the door open for potential rate increases. Here is a link to the transcript of his speech: http://www.federalreserve.gov/newsevents/speech/bernanke20080822a.htm.

It is a refreshing change of pace from Alan Greenspan’s difficult to follow ramblings. I strongly recommend that you read the entire speech to gain a better understanding of where Federal Reserve policy is headed. Odds jumped from 18% to 26% of a ¼ point increase in interest rates by the end of 2008. However, the highest probability is that the rates will stay the same until the end of the year.

Here is the 60 minute chart of the EUR/USD. You can see that the Dollar clearly liked hearing what Bernanke had to say, ending the EUR/USD bounce with a nice move down today on a stronger dollar. We are maintaining our bullish dollar, short EUR/USD bias.

David Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.