There are plenty of holes that the Chairman of the Fed will want to avoid digging in Jackson this afternoon, when he makes his much-anticipated address to the annual gathering of central bankers at the Wyoming resort town. After a torrid month on the markets all eyes are on him, and his words will be closely monitored for hints of future policy – especially more quantitative easing.
Quantitative easing is of course the euphemism de nos jours for the practice of printing more money to improve liquidity in a tight market - the idea being to turn a potential hard economic landing into a soft one by providing a large cushion of cash to break the impact.
There have already been two rounds of QE in America and the turbulent markets are unsurprisingly very keen on more of the same medicine. But detractors say it hasn’t worked so far, won’t work this time and is undermining trust in the dollar and threatening its status as the global reserve currency of choice. So will Bernanke’s address start the dollar-bill presses rolling once again?
There is certainly an argument to say that he might. US growth forecasts have been revised sharply down this year – attempts to brush the slowdown off as the result of temporary factors like the Japanese earthquake don’t really hold much water any more. Furthermore, the commodities price boom seems to be slackening with the concomitant easing of inflationary pressures. There is also the fact that a weak dollar helps deflate debt and makes exports more competitive.
More QE hasn’t been entirely ruled out on this side of the pond either. Speaking as the ONS confirmed sluggish Q2 growth of 0.2%, MPC hawk Martin Weale has said that it could be used again to offset the possibility of deflation should the need arise.
On the other hand, the evidence that QEs 1 and 2 have really made much difference to the underlying US economic situation is limited. Apart from providing the wherewithal for a mini-boom for commodity traders over much of the past couple of years, that is. And Bernanke will not want to make the same mistake he did at last year’s speech, which came to be seen as a tacit acknowledgement that more easing was on the way, when in reality it wasn’t.
To be fair, such is the market appetite for another free cash injection that even the most anodyne expressions are likely to be interpreted that way by some. But it’s the political opposition to any proposal for QE3 which will really make or break things – the rise of the Tea Party movement and the resurgence of the Republican right in American politics will make QE3 a lot harder to push through. Presidential candidate Rick Perry called Bernanke ‘almost treasonous’ recently: that kind of strength of feeling is hard to ignore.
Besides, it’s only a couple of weeks since the US equivalent of the MPC stunned Wall Street by stating that interest rates will remain at historic lows for the foreseeable future, a remarkable pronouncement whose impact has yet to fully sink in. So the truth is that Bernanke is unlikely to make any big announcements this afternoon. But doubtless his words will be pored over for hints, coded signals and veiled suggestions all the same…