The expectations are so high for Fed Chairman Ben Bernanke Thursday to say something revealing about more Fed easing that he can probably only disappoint markets.
Bernanke's 10 a.m. testimony before the Congressional Joint Economic Committee, comes on the heels of a major stock market rally, inspired in part by optimism for more Fed easing.
Stocks had their best day of the year, rising 286 points to 12,414, and the S&P 500 rose 29 to 1,315.
"What's he (Bernanke) going to say? Is he really going to get in a helicopter and dump money?" said Steve Massocca of Wedbush Securities.
Developments in Europe could also be key Thursday, after a Reuters story Wednesday quoting German officials said a deal is in the works that would enable its banks with aid from euro zone countries, but without strict new reforms. Markets will be watching as Spain conducts a bond auction, ahead of the New York market open.
"Anything out of Europe that would suggest they put an even stronger band-aid on their issues, and if you also get some support from the Fed, then I do think there's a possibility we continue this rally, but I think we're increasingly dependant on monetary policy to keep things going," said Gina Martin Adams, institutional equities strategist at Wells Fargo Securities.
Adams said the market's outsized move Wednesday was a concern. "Any time you get these gigantic moves it actually gives me a little bit of pause with respect to a bear market trend," she said.
Even though some analysts see little impact from further Fed easing with already historic low yields, all types of risk assets roared ahead Wednesday while as investors unloaded securities that were the safe havens of choice just a week ago.
Fed Vice Chair Janet Yellen, however, may have served as a messenger for the Fed chairman when she spoke in Boston Wednesday evening, .
"There are a number of significant downside risks to the economic outlook, and hence it may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest," she said in a speech prepared for delivery at an event organized by the Boston Federal Reserve Bank.
Bernanke's tone on the economy will be key, as it was the poor May jobs report last Friday that turned the market view from a Fed on hold to a Fed that may take action at the June meeting or later.
"He does need to very specifically reaffirm his commitment to easing and his willingness to ease, and probably acknowledge a lighter economic scenario. I don't know that the market is so keyed up on his speech that there will be a reaction. I would be a little more worried about Spain then I would Bernanke to move the market," Adams said.
Bernanke got the nickname "Helicopter Ben" after he referred to a statement by Nobel economist Milton Friedman about fighting deflation by using a helicopter drop of money.
“There’s just been, for the last 48, 72 hours a growing feeling that a 10 percent decline in the stock market is as deep a decline as you would get with Ben Bernanke lurking tomorrow,” said Dan Greenhaus, global strategist with BTIG.
Besides Bernanke, there is a group of Fed speakers during the day, and there is some key datas, including the 8:30 a.m. weekly jobless claims. Consumer credit is reported at 3 p.m.
San Francisco Fed President John Williams reiterated just before the market close Wednesday that the Fed must be to achieve its goals of maximum employment and price stability.
Thursday's Fed speakers include Boston Fed President Eric Rosengren who is on a panel in Denmark at 5:45 a.m. ET; Atlanta Fed President Dennis Lockhart, who speaks on the economy and policy at 12:10 p.m., and Minneapolis Fed President Narayana Kocherlakota who spekas on monetary policy at 1:15 p.m.
Dallas Fed President Richard Fisher speaks on the Chinese currency at 3:30 p.m., and Chicago Fed President Charles Evans will be interviewed by Maria Bartiromo on "Closing Bell" at 4:10 p.m.
The Fed also meets on Basel III recommendation on banks at 3:10 p.m. ET.
Traders also said the in the Wisconsin recall election is a good sign for GOP presidential candidate Mitt Romney, and a negative for President Barack Obama.
"I think that's resonating with people," said Massocca. "We're no longer killing politicians that make moves to reduce deficit spending. It sounds like the public is fully supporting it."
The stock market Wednesday continued to gain after the Fed released its beige book at 2 p.m. which said the U.S. economy expanded at a “moderate rate” in March and April, better than its previous modest to moderate rate. The Fed, however, also noted that its contacts were less optimistic.
"It's a little bit more upbeat than I might have thought—a little less subdued," said David Ader, chief Treasury strategist at CRT Capital. "This is marginal stuff. It was before the nonfarm payrolls and other things. So in context, it sort of comes across as old news."
Earlier Wednesday, the European Central Bank , initially disappointing markets. The Bank of England meets Thursday morning, and there’s speculation it will carry out another round of easing.
The type and timing of Fed easing has become the new debate on Wall Street, replacing expectations that the Fed was not ready to do more quantitative easing. But a weak series of economic reports and the dismal jobs report for May, showing just 69,000 jobs created, sparked new expectations the Fed would take action.
One theory is that the Fed extends its Operation Twist, which is scheduled to expire at the end of the month. That program differs from quantitative easing in that the Fed buys longer duration Treasurys and sells an equal number of shorter duration notes, without expanding its balance sheet.
If the Fed decides to do a “QE3,” that could involve the outright purchase of more securities—mortgages or Treasurys.
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