Will He Or Won’t He?
All eyes turn to the sleepy little ski resort town of Jackson Hole, Wyoming this week.
The Kansas City Fed is holding their annual Economic Policy Symposium. And investors are waiting with baited breath for Ben Bernanke to provide clues about the Fed’s next move on monetary policy.
Many are expecting a repeat of the 2010 meeting when Bernanke set the stage for a second round of quantitative easing (QE2). At the time, experts were saying the Fed had no options left to boost economic growth, but the Fed Chairman made it clear surrender was not an option.
In his famous August 2010 speech, Bernanke shocked the world by saying the Fed was “prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.”
Then in November 2010, Bernanke followed through on his promise. He announced the Fed would buy an additional $600 billion worth of Treasury securities by the end of the second quarter 2011.
And QE2 was officially set in motion.
For investors, Bernanke’s Jackson Hole speech provided the spark for a much needed rally. In fact, it ignited an eight-month bull run that sent the S&P 500 Index surging by more than 27%.
So naturally, many investors are expecting a similar market reaction to Bernanke’s speech this year.
Market optimists are looking for Bernanke to lay the groundwork for a third round of quantitative easing (QE3) when he speaks on Friday. They believe the Fed must act soon to prevent the US economy from stalling if not sliding back into recession.
In fact, investors have already begun driving the market higher in anticipation of QE3.
Since early June, the S&P 500 has gained more than 10% in value. And it’s now flirting with levels last seen more than four years ago during the early days of the financial crisis.
But are the bulls correct in presuming Bernanke will suggest QE3 is just around the corner?
I don’t think so…
The optimists point to the Fed Meeting minutes from early August as proof QE3 is a done deal. Those minutes show Fed members were leaning toward more quantitative easing at the time.
But since that meeting was held, a number of economic reports have come in better than expected.
In other words, the economic picture is not as dire as it was just a few weeks ago. Without a clear cut economic case for more easing, it’s unlikely the Fed will take extreme measures.
What’s more, the Fed probably doesn’t want to act ahead of important upcoming events in Europe.
The European Central Bank is expected to provide more specifics on how Europe’s bailout strategy will work when it meets on September 6th. And a German court is expected to issue a decision on the legality of the European Stability Mechanism on September 12th.
Good news out of Europe could provide the stability needed for global financial markets and make it unnecessary for the Fed to unveil QE3 at this time. With the Fed having already employed two rounds of quantitative easing, they’re not likely to jump the gun with QE3.
Of course, this is all just speculation at the moment.
The Bernanke Fed has demonstrated in the past that it’s not afraid to go against popular opinion. All we can do now is stay tuned to see if Bernanke gives any clue as to what he has up his sleeve.
Profitably Yours,
Robert Morris
Category: Stocks
