VOL. 36 | NO. 34 | Friday, August 24, 2012
Few think Bernanke to signal action at conference
WASHINGTON (AP) — Investors are hoping Chairman Ben Bernanke will at least hint Friday that the Federal Reserve is ready to launch another round of bond purchases to try to lower long-term U.S. interest rates and spur more borrowing and spending.
He's unlikely to deliver.
Economists who monitor the Fed doubt Bernanke will say anything dramatic when he speaks at an annual economic conference in Jackson Hole, Wyo. Many think a slightly brighter economic outlook has lessened the urgency for the Fed to act soon.
"I don't expect him to give some significant clue as to what the Fed's next move is," says economist Timothy Duy at the University of Oregon.
At the end of every August, economists and central bankers convene in the Rocky Mountains at a symposium organized by the Federal Reserve Bank of Kansas City. They present papers and argue about economic issues. But mostly, they wait to see what the Fed chairman has to say.
In August 2010, Bernanke's remarks at Jackson Hole triggered a sustained stock-market rally. He hinted then that the Fed might begin a second round of bond purchases, a policy called quantitative easing, or QE2. The Fed did start buying bonds three months later.
The U.S. economy is again struggling to grow. It expanded at a tepid 1.7 percent annual rate in the April-June quarter, the government estimated Wednesday.
Hopes for further Fed action rose last week when the central bank released minutes of its July 31-Aug. 1 meeting. It showed that officials spoke with increased urgency about the need to provide more help for the U.S. economy.
The Fed's policy committee decided that action "would likely be warranted fairly soon" unless it saw evidence of "a substantial and sustainable strengthening" of the economy. The comment raised expectations that the Fed could announce a move as soon as its next meeting Sept. 12-13.
And in a letter to a House lawmaker last week, Bernanke wrote that "there is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery."
Still, Duy says, "it's not 2010."
Back then, Bernanke feared that the economy might slide into a deflationary spiral in which falling prices pull down business profits and send the economy back into recession.
This year, the economy appears in less danger. Job creation and retail sales last month proved stronger than expected. And in the latest sign of a recovery in housing, home prices rose in June from a year earlier, the first such increase since the summer of 2010. So there may be less pressure on the Fed to act.
"We've seen enough tentative improvement that it's got to give them a little pause," says Ethan Harris, co-head of global economic research at Bank of America Merrill Lynch.
The Fed chairman will likely want to see the government's Sept. 7 report on job growth and unemployment in August before committing to a change in policy.
And QE3 isn't the Fed's only option. It already plans to keep short-term interest rates near zero through late 2014 unless the economy improves. It could settle for extending that pledge into 2015.
Critics say Fed policy won't make much difference anyway. Interest rates are already near historic lows.
"Who cares what the Fed's going to do? It's not effective any more anyway," says Steve Quirk, senior vice president at TD Ameritrade. "What are you going to do — lower interest rates? To what, negative?"
For a while it looked as if Bernanke might be upstaged in Jackson Hole by Mario Draghi, president of the European Central Bank. But Draghi on Tuesday canceled plans to attend the conference and to speak on a panel Saturday morning.
Draghi faces more urgent problems and has more options to deal with them. Last month, Draghi vowed to do "whatever it takes" and "believe me it will be enough" to save Europe's single currency, the euro. Some members of the 17-country eurozone, including Italy and Spain, are struggling with high debts and weak economies that could force them to abandon the euro.
Markets rallied on Draghi's promise. Investors assumed the ECB would wade into the bond market and buy Italian and Spanish government debt. Its purchases could drive Italy and Spain's borrowing costs down to sustainable levels and ease the pressure on them.
But it's unclear how aggressive Draghi will be. A week after making his whatever-it-takes pledge, Draghi retreated somewhat. He suggested that the ECB would act in a big way only after European governments did more to improve their finances. Germany, Europe's most powerful economy, has often opposed aggressive action by the central bank.
On Wednesday, though, Draghi revived hopes for ECB action. He urged Germans to support his efforts to rescue the euro. He's expected to say more at an ECB meeting next week about plans for a bond-buying program to ease borrowing costs for debt-ridden governments, including Spain and Italy.
Investors are eager to hear about Draghi's plans as well as Bernanke's.
These days, says Thomas Lam, economist with the investment firm OSK-DMG in Singapore, "markets are equally sensitive to comments from Bernanke and Draghi."