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The Heat Is on Bernanke—but Will He Say Anything?

Fed Chairman Ben Bernanke’s speech in Jackson Hole is long on anticipation but will probably come up short on news.

Fed Chairman Ben Bernanke
Joshua Roberts | Bloomberg | Getty Images
Fed Chairman Ben Bernanke

The Fed chairman speaks at 10 a.m. ET Friday at the Kansas City Fed’s annual symposium in Wyoming, and traders are hoping for some new insight into what the Federal Reserve (learn more) is thinking, including whether and when the Fed might take further easing steps. However, economists and Fed watchers don’t expect Bernanke to say much new, as the Fed continues to weigh incoming economic data ahead of its Sept. 12 meeting.

“I don’t think Bernanke is going to be signaling what the Fed is going to do. lt’s too close and it’s too close a call for him to be signaling anything,” said Bruce Kasman, chief economist at JPMorgan.

There is a busy calendar of economic news in the week ahead, but the Bernanke speech trumps all else. The Fed beige book on the economy, second quarter GDP (learn more) revisions and consumer confidence are among the reports expected. Retailers will release chain store sales Thursday, giving an early look at the back-to-school shopping season.

The Republican conventionwill also be underway, and Wall Street will be watching to see how well the week goes for GOP presidential candidate Mitt Romney, favored over President Obama by many in the markets but slightly behind Obama in the polls.

“What’s interesting is Romney really has two challenges. The first is, he can’t screw up. A major mistake during his convention will hurt his chances for winning,” said Daniel Clifton, head of policy research at Strategas. “And he’s really got to give people a reason to elect him.” Clifton mention the example of Bill Clinton, who used his convention as a way to convince voters the economy was an issue he was best equipped to deal with.

Traders in the energy markets will also be watching the progress of Isaac as the storm moves into the Gulf of Mexico, with oil and gas drilling rigs in its path.

Investors will also be sorting out the aftermath of the late Friday jury verdict, which gave Apple a $1 billion victoryover Samsung. Samsung was found to have infringed on Apple patents on phones and tablets. Apple’s stock gained more than 1.7 percent in after-hours trading, reaching a new high.

Fed Ahead

Bernanke’s speech follows weeks of speculation about whether the Fed will carry out another round of quantitative easing (learn more), or asset purchases. Risk assets got a temporary boost in the past week when the Fed’s minutes from its Aug. 1 meeting showed that members were predisposed to more easing, but that meeting was held before a series of economic reports came in better than expected. St. Louis Fed President James Bullard pointed that out in an interview on CNBCthis week, and he also said the market’s expectations for more QE have been too high this summer.

“I don’t think he (Bernanke) says anything a whole lot different. He’s going to reiterate that there’s scope for more easing and he’s pretty much told us that asset purchases and changes in the rate guidance are on the path ahead of us. It’s just hard to figure out which comes first,” said Ward McCarthy, chief financial economist at Jefferies.

McCarthy said he sees a 70 percent chance the Fed extends its rate guidance at the September meeting. The Fed is expected to say it will keep interest rates very low into mid-2015, from its current end of 2014 time frame. As for QE, McCarthy sees a 30 percent chance it will be announced in September, but a 90 percent chance it is announced by the end of the year, with December the most likely time frame.

“They’ll have a better sense of what is going to be done to prevent an economic cataclysm,” said McCarthy. “If (Congress) they don’t extend the tax cuts, we will be in a recession in 2013. If they don’t extend the tax cuts the Fed will take very aggressive action,” he said.

The expiration of tax cuts is one part of the “fiscal cliff” that will hit the economy Jan. 1 if Congress doesn’t move to extend tax cuts or make budget decisions. Congress is not expected to take any action on taxes or the automatic spending cuts, agreed as part of the debt ceiling compromise, until after the election.

Some economists say the Fed may also want to keep its powder dry until it sees how events unfold in Europe next month. On Sept. 6, the European Central Bank (learn more)meets, and the market is looking to see more detail on how Europe’s bailout funds will function. Additionally, a German court rules on the legality of the European Stability Mechanism, or ESM, on Sept. 12, the first day of the Fed’s two-day September meeting.

ECB President Mario Draghi participates in a panel at the Jackson Hole symposium on Saturday morning.

“We’re not building into our expectation that Jackson Hole is going to steal the thunder from the ECB meeting … or the Fed meeting,” said Kasman. Kasman said Bernanke would not front run the Fed meeting or speak for the committee, and Fed members will want to get a look at the August employment report and other data before making a decision on easing.

Kasman expects to see the Fed act on rates guidance in September. “We think the Fed will extend the guidance on rates to 2015, and we’re on the margin believing the Fed will do a limited QE — something in the range of $250 billion that extends into January,” said Kasman.

Quantitative easing encourages investors to move into riskier assets and has helped support the stock market. The Fed currently is conducting Operation Twist, a program under which it buys longer-dated Treasurys and sells an equal amount at the short end. Unlike QE, twist does not expand the Fed’s balance sheet.

Mesirow Financial chief economist Diane Swonk said she expects the Fed to move to asset purchases this fall, with mortgage-backed securities a likely target. But Bernanke won’t give much guidance on that Friday. “I think he’s going to play his cards close to the vest. If he really believes it, he’ll say it but they are in such a difficult position right now. They may have to coordinate with the ECB by Sept. 13,” she said. “There’s a lot of things that you could look at and say, it would make sense to go in September but only under certain conditions. It would not be a slam dunk.”

The market’s sensitivity to possible Fed action was seen Friday when a story in the Wall Street Journal during the trading day, quoted part of Bernanke’s written comment to Rep. Darrell Issa (R-Calif.). Bernanke made clear, as he has in the past, that the door is open for more QEif needed and that the Fed will weigh the costs against the benefits.

Bernanke also defended the Fed’s actions in the letter to Issa, while pointing out that politicians need to take fiscal actions. More of that may be heard in his speech Friday, and more criticism of the Fed may be heard from the Republican convention. Romney has said he does not see a need for more Fed easing, and that it will not grow the economy.

Stocks in the past week touched a new four-year high, before falling back for the first weekly loss in six weeks. The S&P 500crossed the 1400 level for the first time since May, ending the week at 1411, down seven points. The Dow lost 117 points, or 0.9 percent to 13,157, and the Nasdaq slumped 6 points to 3069. Interest rates moved lower this past week, as Treasury prices rose. The 10-year was at 1.678 percent.

“From 10 to 11 next Friday morning will probably be hopping, but the rest of the week will be a slow week in late August,” said McCarthy.

What to Watch:

Monday

6:00 a.m. Chicago Fed President Charles Evans speaks in Hong Kong

10:30 a.m. Dallas Fed Survey

12:15 p.m. Cleveland Fed President Sandra Pianalto on economy

Tuesday

9:00 a.m. S&P Case/Shiller home prices

10:00 a.m. Consumer confidence

10:00 a.m. Richmond Fed survey

1:00 p.m. $35 billion 2-year Treasury auction

Wednesday

7:00 a.m. Mortgage applications

8:30 a.m. Real GDP (Q2 second)

10:00 a.m. Pending home sales

1:00 p.m. $35 billion 5-year Treasury auction

2:00 p.m. Beige book

Thursday

Chain stores report monthly sales

8:30 a.m. Initial claims

8:30 a.m. Personal income

11:00 a.m. Kansas City Fed survey

1:00 p.m. $29 billion 7-year Treasury auction

Presidential candidate Mitt Romney speaks at Republican convention

Friday

9:45 a.m. Chicago PMI

10:00 a.m. Fed Chairman Ben Bernanke speaks at Jackson Hole symposium

9:55 a.m. Consumer sentiment

10:00 a.m. Factory orders

Saturday

10:25 a.m. European Central Bank President Mario Draghi on panel at Jackson Hole symposium

Follow Patti Domm on Twitter: @pattidommQuestions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.