It is annual rite rite of late summer: The Federal Reserve chairman flies far beyond the Beltway to scenic Jackson Hole, Wyo., for a major address on monetary policy.
When central bank chairman Ben Bernanke takes part in the ritual Friday, his influential audience will be hanging on every word, listening for any hint of what policymakers might do next month to spur the sluggish economy. Pundits and the few journalists invited will quickly rush out to expound on Bernanke's speech, taking advantage of the telegenic setting against the Teton mountains.
But don't hold your breath. Most Fed watchers expect Bernanke to avoid tipping his hand ahead of the Sept. 12-13 rate-setting meeting, especially given recent signs of a slight firming in the economy.
The title of the Friday morning speech, "Monetary Policy Since the Crisis," suggests Bernanke "might take a broad ‘lessons learned’ approach” rather than lay out potential next steps, Goldman Sachs economists said in a note.
In part that is because the Fed has little ammunition left after five years of slashing interest rates to rock-bottom levels and injecting cash into the economy through other means. But also it is because economic data are beginning to show signs of improvement, and central bankers will want to gather as much data as possible before acting.
In particular the August jobs data, due to be published Sept. 7, could be key to Fed thinking.
“If the chairman's thought process is anything like ours, he has not yet decided whether to press for a substantive easing move as soon as Sept. 13,” Credit Suisse chief economist Neal Soss said in a recent note.
Investors are waiting to see whether the Fed will go forward with a third round of bond buying, aka quantitative easing, aka QE3.
At its last meeting, which ended Aug. 1, Fed policymakers agreed they were ready to act “fairly soon unless incoming information pointed to a substantial and sustainable strengthening” of the economy, according to minutes released last week.
“It is not clear whether these positive developments are compelling enough to postpone what had looked like a strong chance of a September 13 QE3 announcement,” Soss said, referring to the past month's worth of data.
Indeed, the Fed itself issued a report Wednesday that showed manufacturing activity slowing in many parts of the country in July and August.
Joseph Gagnon, senior fellow at Peterson Institute for International Economics, noted that Bernanke probably will at least want to study upcoming employment and manufacturing data before making any decisions.
“What he might say (Friday could) give us a hint of how he views the incoming data," Gagnon said.
The uncertainty of what the upcoming numbers will show could lead to a speech that disappoints investors hoping for a road map.
“Since the August meeting, I think the data has improved enough to push off QE3, but we may see something on the rate guidance front,” said Michael Gapen, director of U.S. economics and asset allocation for Barclays.
"I think the market after the minutes is very focused on the question of when, and I don't think he’s going to give much clarity on that," said Lewis Alexander, chief U.S. economist for Nomura.
The “benefits and costs” of monetary stimulus measures mentioned in the latest Fed minutes gave some analysts hope that Bernanke, in his speech Friday, will catalog the different actions the Fed is considering and potentially indicate which actions are at the top of the list.
Besides adding to the money supply via either finite or open-ended purchases of Treasuries or mortgage-backed securities, Bernanke could discuss a commitment to keeping rates low even further into the future, discount window lending and changing the rate the Fed pays banks to warehouse their cash reserves with it. Already the Fed is on record that it plans to keep interest ratest at current "exceptionally low levels" at least through late 2014.
In discussing the costs, Bernanke could certainly mention the potential for inflation over the next few years. The chairman also might broach the topic of whether an increase in the money supply would overheat the stock market, otherwise distort financial markets or encourage poor financial decision-making.
Investors will also miss the chance to get insight from Europe's top central banker after European Central Bank President Mario Draghi withdrew from the Jackson Hole conference Tuesday. Draghi had been scheduled to speak Saturday to an audience intensely interested in how European policymakers plan to turn around the eurozone's ailing economy.
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