What Markets Really Think Bernanke Will Say on Friday
The drum roll to Ben Bernanke’s Friday speech in Jackson Hole is getting louder, and yet there is not much new the Fed chairman is likely to share with markets.
Bernanke speaks at 10 a.m. ET Friday at the 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.
Bernanke’s speech follows weeks of speculation about whether the Fed will carry out another round of quantitative easing (learn more), or asset purchases.
(Confronting the Crisis: Tune in all day Thursday and Friday to CNBC for coverage on the Fed at Jackson Hole.)
Risk assets got a temporary boost last 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 a recent interview on CNBC, 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.
Gina Martin Adams, institutional equity strategist at Wells Fargo Securities, said Bernanke has been using more talk than action, and he'll probably continue to do so at Jackson Hole.
"He's kind of set a precedent. His whole year has been kind of boring. No new action, but a lot of talk. Operation Twist is about the only thing they've done," Adams said.
"It's a lot of willingness to do what it takes, but not a lot of action to back it up," she said. "As far as stocks go, that's enough. The economy may beg to differ."
The bond market's expectations are low for the Fed chairman's speech.
“We do not feel Bernanke will use that forum to signal any change,” said Charlie Parkhurst, managing director in government bond trading at Barclays, noting that is what the bond market expects as well. “We’ll wait for the payrolls, and the FOMC (Learn More) meeting. We don’t think there will be any policy change of any sort, or any hint of it.”
In its Operation Twist program, the Fed buys long-dated Treasurys and sells the same amount of shorter duration securities. Unlike QE, the program does not expand the Fed balance sheet.
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. (Read More: Ignore the Fiscal Cliff and Buy Stocks)
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 Bankmeets, 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 Tuesday cancelled his plans to attend Jackson Hole, where he was scheduled to appear on a panel 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.
Some Fed watchers believe the Fed could do an open-ended asset purchase program this time, and that it may purchase a blend of Treasury securities and mortgage debt.
“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 QE if needed and that the Fed will weigh the costs against the benefits. Despite the lack of new information, stocks rallied.
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, underway in Tampa, Fla. this week. GOP presidential candidate Mitt Romney has said he does not see a need for more Fed easing, and that it will not grow the economy.
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