August 20, 2012
David R. Kotok

Triage is a medical term. It means the sorting of patients according to the urgency of their need for care (

On August 31, 2012, Fed chairman Ben Bernanke will have the opportunity to deliver an updated triage report during his morning speech in Jackson Hole. He can be ambiguous, which would counter the purpose of triage. He can also be direct and focus on the condition of the US economy and the Fed’s response.

Bernanke’s triage assessment may take one of three forms.

Case 1. The patient is recovering and doing better all the time; no change in prescription; continue scheduled office visits. Bernanke would argue the positive case. The economy is heading for a slow but continuing and accelerating recovery. He can point to some supportive housing data. He can point to small yet positive, sequentially improving numbers in the monthly employment report. He can point to the success of Fed policy in averting a worse outcome than we have had. This is the counterfactual argument. He will say that both low interest rates and increased liquidity stemmed deterioration and arrested a decline that was underway since the beginning of the 2007 financial crisis.

This triage would result in no change in Fed policy. It would affirm a continuation and completion of the presently scheduled “Operation Twist.” The Fed would continue to “wait and see,” with a commitment to maintain low interest rates through the end of 2014.

Case 2. The patient seems stable but risks are still high; hence, continue to administer the presently prescribed medicine and remain vigilant. Be prepared for emergent action. A halter monitor and vital-signs monitoring are required. Bernanke would suggest that there is no robust recovery. He would be affirming slow and steady, one to two percent growth, low inflation, and a high-risk profile for the economy. Housing will bottom, but will not get a lot better rapidly. There are many high-risk elements present around the world. The Fed is on hold and exercising plenty of vigilance; however, there is still the option to do a lot more.

What will the more be? Bernanke is likely to be vague as he was in his Congressional testimony. He will be vague because he does not have any reason to lay out very specific programs other than the ones that are known. This economic outlook of near two percent growth awaits the outcome of the elections. It contemplates the fiscal cliff debate. It prepares for the new regime or administration and for the new balance in the Congress. In these circumstances, the Fed’s best position is to do nothing but watch and wait. Bernanke is most likely to offer Case 2 as his triage assessment.

Case 3. The patient is still too sick. Additional meds and highly technical procedures are needed. Commence them ASAP. Bernanke will say that due to the very high risks, the Fed must adopt this stance. Europe is unresolved. Geopolitical risk around the world is high. An oil/energy price shock and food price shock are simultaneously underway. The Fed cannot do anything about them, because the shocks are exogenous. The Fed cannot grow corn and cannot drill for oil. Bernanke has to explain why monetary policy is not the tool to use to address exogenous shocks. He can describe the shocks. He can translate the mechanism by which they flow through the economy and show up temporarily in the price indices. He can talk about the price indices about which the Fed is most concerned. He can point to a different calculus of price indices to support the notion that the Fed should remain on hold and watch and wait. Bernanke has done that in the past when he referred to special calculations in the price indices. Bernanke has defined inflation targets that the Fed uses to determine whether inflation is an issue that requires the Fed to take action.

Will Bernanke triage? Of course, we do not know. No one knows. Can he cover all three scenarios we have laid out? Of course he can. Can he lay out the massive amount of conflicting information and address the enhanced risk that exists in the present environment? Yes, he can.

The world waits for the chairman. The emergency room waits for the triage assessment.

David R. Kotok, Chairman and Chief Investment Officer

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