Bernanke to Cast His Vote on U.S. Economy at Jackson Hole

Fed chairman is expected to tip his hand on QE3 action the FOMC may take before the presidential election

A market watcher analyzes Ben Bernanke's Jackson Hole speech in 2011. (Photo: AP) A market watcher analyzes Ben Bernanke's Jackson Hole speech in 2011. (Photo: AP)

The global markets will be watching Federal Reserve Chairman Ben Bernanke on Friday morning when he gives his annual speech at the Fed’s retreat in Jackson Hole, Wyo., on the state of the U.S. economy.  His speech is highly anticipated because whether the Fed goes for another round of quantitative easing in this presidential election year is viewed as a vote on whether Barack Obama should remain in office.

Indeed, Bernanke’s speech will follow Mitt Romney’s Thursday night acceptance speech as the Republican candidate for president. As a result, the language the Fed chairman uses on Friday is sure to be analyzed even more closely than usual by market watchers.

So far, the consensus is that before the election, the Federal Open Market Committee will announce a third round of quantitative easing, or QE3, either at the FOMC’s Sept. 12-13 or Oct. 23-24 meeting.

“Tomorrow, Bernanke will go over more of the rewards than the risks of doing more quantitative easing, and that sets the stage for another rigorous debate at the Sept. 13 meeting,” said John Canally, investment strategist at LPL Financial, in a phone interview on Thursday. “I wouldn’t be surprised to see the Fed actually announces a new round of quantitative easing on Sept. 13.”

Expect to Hear the Words ‘Sluggish’ and ‘Slow’

However, Canally noted, the FOMC still has its Operation Twist Treasury program in place until the end of the year. In addition, the upcoming election might make the Fed think twice before making any big decisions, he said, but added that the Fed has raised or lowered rates in every single election year since 1968.

Canally expects to hear words such as “sluggish,” “slow” and “soft” in Bernanke’s speech.

“There’s been little if any sign of a sustainable or substantial improvement in the economy since Aug. 1,” he said. “It’s gotten better, but it’s not substantial. You can sustain 2.2% GDP growth, that’s fine, but the Fed’s looking more toward 3.0%.”

Similarly, the economics team at Bank of America Merrill Lynch views Bernanke’s Jackson Hole speech as a reliable signal of future Fed policy. This time around, the economists write in a comment, “Limited action at Jackson,” the FOMC will likely be inflation doves and look for more stimulus in September.

“We anticipate a relatively dovish speech, signaling a high probability of additional Fed easing at their Sept. 12-13 meeting,” the BofA-ML economists write. “However, keep in mind that ‘easing’ and QE3 are not synonymous. While a change in the Fed’s rate guidance is very likely, Bernanke is probably not ready to preannounce QE3. Hence his remarks could disappoint the markets.”

Zero to 25 BP Fed Funds Rate Into 2015?

Meanwhile, Sharon Stark, chief market strategist of Sterne Agee, expects the Fed to announce another round of asset purchases and to extend the forward guidance for a zero to 25 basis point fed funds rate through the middle of 2015.

“I do not expect Bernanke to launch another round of quantitative easing at the [Jackson Hole] meeting, but do anticipate strong rhetoric on coordination with fellow central bankers and policy makers to provide ample stimuli and liquidity to the financial system to encourage job creation and maintain stable prices,” Stark said in a statement.

Due to heightened risk of default in Europe and sluggish growth in the U.S., Stark expects a QE3 announcement from the FOMC in either September or October.

“I expect a QE3 of $400 billion to $600 billion to be evenly distributed to Treasuries and mortgage-backed securities, and believe the Fed may also pursue an additional $300 billion in MBS purchases under QE3, that would suggest another $25 to $30 billion of investments over nine months,” she wrote.

Read PIMCO’s Gross Says Fed Easing Will Happen Despite Upward Revision of Q2 Growth at AdvisorOne.

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