Markets on edge for key Bernanke speech

The last time Ben Bernanke communicated to the public,
the US stock market jumped, then plunged, and then soared
© AFP/File Mandel Ngan

AFP

WASHINGTON (AFP) - The last time Ben Bernanke communicated to the public, the US stock market jumped, then plunged, and then soared, all over a few minutes -- no one was sure if his statement boded good or bad for the economy.

So when the US Federal Reserve chairman speaks at Jackson Hole, Wyoming, on Friday, after weeks of extreme market turbulence, hopes are that he will deliver some clarity both on the economy's state and whether the Fed will give it a new boost.

With growth in a near-stall, and vulnerable to turbulence imported from troubled Europe, investors want a clear signal that the US central bank chief is ready to act to prevent a return to recession.

"The best thing he can do on Friday is to project a sense of confidence: 'Yes we know what is needed, yes we will do it if it is necessary,'" said Nariman Behravesh, chief economist at IHS Global Insight.

The landscape for Friday's speech, at the annual Federal Reserve summit at the western mountain resort, is eerily like last year's: the economy seemed to be stagnating, markets were losing faith in the recovery, and the government seemed unequipped to counter it.

At Jackson Hole on August 27, 2010, Bernanke boldly signaled the Fed's $600 billion QE2 program -- QE for "quantitative easing" -- in which the central bank injected liquidity into the economy by buying up US Treasury bonds.

That sparked optimism for the economy and a nine-month stockmarket bull run that only expired in June when a new fog of economic malaise moved in.

Markets have now dropped back to where they stood last October; fears are rising of a new recession; and budget politics have left the government even more unable to act to stimulate the economy.

But, two months after QE2 ended, analysts see Bernanke as having less potent tools for the job, and unlikely to do more than suggest what the Fed can do.

"The dilemma that that the Fed faces is that there are not a lot of choices here," Behravesh told AFP.

"Fiscal policy is not really in the mix... I don't think the Fed likes it, and the Fed would rather not be in this situation, but it is."

The speech has traders in disparate markets on the edge of their seats.

"We are seeing a lot of trepidation ahead of the Federal Reserve speech on Friday," said oil trade expert Matt Smith of Summit Energy.

"The market does not want to do anything strategically until we see what he has to say on Friday morning," Ray Attrill, a BNP Paribas currencies specialist, said.

The last time Bernanke "spoke" to the public was in a statement after the August 9 meeting of the Fed's policy board.

Warning of rising "downside risks" to the economy, the Fed promised ultra-low interest rates for two more years.

But otherwise, it only said that they were weighing what tools they had to deal with slower-than-expected growth.

Because that came after a bruising political battle that left the White House and Congress with almost no room to help the economy, and as sovereign debt worries mounted in Europe, the Fed statement had little real positive impact.

It "signaled to investors that the Fed's outlook was sufficiently glum to make it hold its policy rate at zero for that long, reinforcing their sense of angst," said Vincent Reinhart, an American Enterprise Institute scholar and a former Fed official.

Since then, too, a number of economists have revised downward their economic forecasts, to growth of less than two percent for the second half after what could have been below one percent in the first half.

Few think Bernanke will signal a formal QE3 on Friday, but many think he will make clear the Fed will inject money as in QE2 if it sees the need.

Moreover, said Behravesh, he could signal that the Fed will move to drive down long term interest rates, in the same way that short-term rates have fallen to near-zero.

That could stimulate everything from corporate investment to consumer buying of homes and automobiles, he said.

"The Fed could potentially tip the balance in terms of people being more willing to make those bets, those big investments," he said.

© AFP -- Published at Activist Post with license