The great and good are currently gathering for the annual Economic Policy Symposium in Jackson Hole, Wyoming. Financial markets around the world will be listening very carefully to what the Fed Chairman Ben Bernanke has to say when he delivers his speech on Friday.
This time last year he first talked about QE2 and because markets are worrying about lack of economic growth, there is growing anticipation that ‘Helicopter Ben’ will yet again ride to the rescue.
August has been a difficult month. We have heard from the ECB that “all necessary measures to support financial stability and growth will be taken.” Less than 3 weeks ago the Fed issued a statement promising unchanged interest rates for two more years. Markets have been underwhelmed. Are there any more tools in the box?
To answer this question we must go back to 2002 when Ben Bernanke delivered a speech to the National Economists Club in Washington in which we set out what actions could be taken if there was ever a risk of deflation in the US. What he did not realise at the time was that in this speech he defined the agenda for his time as Fed Chairman.
In summary he said;
1. Preventing deflation is easier than curing it.
2. Make sure that the banking system and capital markets are well capitalised and liquid.
3. Central banks should act pre-emptively and aggressively in cutting interest rates.
4. Print money.
5. Lower long term interest rates.
6. Commit to holding overnight interest rates at zero for a specified time.
7. Attempt to influence the yields on privately issued securities.
8. Work with the Treasury to weaken the Dollar.
9. Cut taxes across the board – this is where the helicopter drop of money comment came in, although he was quoting Milton Friedman.
Fast forward to August 2011. QE1 and QE2, together with the interest rate commitment have moved us along to points 5 and 6, and taking into account that the Fed has a further $600 billion to spend on asset purchases over the next 2 years it could be argued that we are already have QE2 ½. Tax cuts are off the political agenda until 2013. So what next?
In reality the US economy is still just about growing and there is inflation not deflation. Despite political pressure to deliver growth in time for next year’s election and, taking into account that it is only a few weeks since the interest rate commitment, Mr. Bernanke may decide that his priority this weekend is ‘first do no harm’. Until there is a clear need for QE3, anything too aggressive could destabilise markets.
Obviously there will be disappointment if there is no news, but markets should probably be satisfied with a plan to lower long term Treasury yields and some fine words. If, however, he does reach the toolbox he better make sure that he finds the sonic screwdriver.