Bernanke Speech to Set Market Course Friday and Beyond  

Fed Chairman Ben Bernanke speaks on the economy and policy, at a time when both are shaky in the eyes of the markets.

Ben Bernanke
Ben Bernanke

Bernanke's Friday morning address in Jackson Hole, Wyo. has become one of the most discussed, debated and dissected of his career, even before he's given it.

"He's going to need a miracle to satisfy all these multiple expectations that are all over the place," said Art Cashin, director of floor operations at UBS. It is hoped that Bernanke will clarify two things - how bad the Fed believes the economy is getting and what it might do about it.

Friday's markets will also get a look at the revisions made to second quarter GDP at 8:30 a.m. That could put the growth rate for the quarter ended June 30 at just 1.3 percent, compared to the previously reported 2.4 percent. That would also be the starting point for the current quarter, which by all signs is showing a continuing drop off in activity.

"Friday is going to bring a meaningful downward revision to GDP...Does the average person in the market know that? I don't know," said Dan Greenhaus, chief economic strategist at Miller Tabak. Consumer sentiment data is released at 9:55 a.m. and could also be a market mover.

Bernanke speaks at 10 a.m. before the Kansas City Fed's annual symposium, which is attended by central bankers, economists and academics, plus an entourage of journalists. He will make his comments behind closed doors, away from television cameras, but on the other side of the country, Wall Street will be hanging on every word.

"The problem the Fed has is their forecast hasn't changed very much, but the probability of a downside event has gone up, and they don't think there's much probability of an upside surprise. The problem they are having is how do they communicate that to people," said Barry Knapp, head of equities portfolio strategy at Barclay's Capital. "It's not a normal distribution. The downside risks are growing, but we can't get more aggressive policy until their forecast moves, and they're not there yet."

"I think people expecting him to say something that's going to be beneficial to the market are fooling themselves," Knapp said.

Communication is what turned the heat up on Bernanke in the first place. When the Fed released the statement after its Aug. 10 meeting, it surprised and confused many in the markets by both downgrading its view of the economy and then immediately moving to a new easing program. Just three weeks before, Bernanke told a different story in Congressional testimony.

"I can't remember a time when there was so much anticipation for a speech..How did he get here? I don't think it's his fault. It's the economy," said J.P. Morgan economist Michael Feroli. But Feroli said the events leading up the last Fed meeting didn't help, nor did the Fed's communication after the meeting.

"The statement itself didn't execute well in conveying a clear message," he said.

The so-called quantitative easing announced in August involves the Fed replacing its maturing mortgage securities with Treasury securities, which in essence keeps the Fed balance sheet stable. In theory, it also could prevents a passive tightening.

The Fed also left the door open to further easing, which some in the market believe could ultimately be multiple trillions in Treasury purchases. The expected outcome would be that the Fed's purchases would help force down rates, helping to spur lending. Traders have been gaming how and when the Fed might act.

Many in the market point to the communications that have come from the newspaper, rather than Fed officials. There was a Wall Street Journal article just before the August meeting that suggested the Fed would adopt a program to replace maturing mortgages on its balance sheet by purchasing more securities. Many in the markets did not believe it would be an imminent action because of Bernanke's July comments.

Tom Grill | Photographer's Choice | Getty Images

Then this week, ahead of Bernanke's speech, another highly-detailed Wall Street Journal story described a split of opinion within the Fed, and noted that at least seven of 17 members disagreed or were concerned about quantitative easing.

"He does have a committee to respect, but he can push the agenda forward. If he lays out the framework and the conditions under which they would act, and kind of lays out the forecast, I think it's possible to infer the likelihood of quantitative easing," said Feroli.

There has also been criticism of Bernanke for not showing stronger leadership, and Fed watchers expect him to use the speech as a way to restore confidence in the Fed's processes and in himself.

"Maybe people were used to a leader from (former Fed Chairman Alan) Greenspan, but there's nothing that necessarily says that's the proper way for a central bank to be governed," Feroli said.

The DowThursday fell 74 to 9985, and the S&P 500 slid 8 to 1047, below a key support level. Bonds saw buying, and the yield on the 10-year moved down to 2.50 percent. Thursday's weekly jobless claims improved slightly to 473,000, but the number of emergency claims rose sharply, worrying investors. The Kansas City Fed's survey, released in the late morning, also painted a gloomy picture. New orders fell sharply, not unlike the Philadelphia Fed survey last week.

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