Jackson Hole: bankers to decide the world's fate

At last year's conference Ben Bernanke dropped a bombshell. This year his options are fewer. Stephen Foley reports

On a crisp morning in Wyoming last August, Ben Bernanke went for a breakfast-time stroll with his mug of coffee, looking for all the world like your uncle on his summer holiday. An hour later he delivered a speech that put a fire under world stock markets and ushered in a new era of monetary policy in the world's largest economy.

Such is the incongruous drama of the annual Jackson Hole symposium, where Mr Bernanke hinted last year for the first time that the Federal Reserve would launch a second round of quantitative easing to try to stoke a US economic recovery. Now that the symposium is upon us again this weekend, what will the Fed chairman do for his next trick?

The answer to that question could not be more hotly anticipated, yet the options available to Mr Bernanke have narrowed substantially. Having created $1.7 trillion (£1 trillion) out of thin air to lend into the credit markets during the panic of 2008 and 2009, the Fed's second round of quantitative easing (everyone calls it QE2) added $600bn to the Fed's balance sheet, as it bought government bonds in the hope of pushing market interest rates lower.

Well, interest rates did remain low, and the Fed's expansionary monetary policy did take the threat of deflation off the table, but as for stoking the economic recovery – the 9.1 per cent US unemployment rate and the grisly sub-1 per cent economic growth rate for the first half of this year suggest that there is only so much bang the Fed can get for its QE bucks.

"It is unlikely that another round of monetary stimulus would simply repeat the actions of prior programmes," says Robbert Van Batenburg of LCM Research. "Apart from public unpopularity, the effect of the prior actions did not achieve its intended goals in a sustainable matter. At the initiation of QE2 the Fed expressed the intent 'to promote a stronger pace of economic growth and to ensure that inflation was at levels consistent with price stability'. While upward price pressure did pick up, it was mostly concentrated in non-core inflation – that is, commodities – while core inflation – wages, the kind of inflation the Fed was trying to augment – barely moved. On top of that economic growth remained anaemic."

The fear is that, with US households paying back their boomtime debts at a steady pace, regardless of how much cheap money is available, and with businesses hoarding cash because the outlook for demand is still so uncertain, it may be that monetary policy is reaching the limits of its usefulness.

These are the sort of big thoughts that the big beasts of economics and central banking get to discuss at Jackson Hole. As for the financial markets, they just want Mr Bernanke to reassure them that he still has ammunition left, and that he is willing to use it. Expect market gyrations this week to reflect the latest speculation as to what the Fed chairman will have to say on Friday morning. Bond yields rose modestly yesterday in part because a consensus appeared to be emerging that Mr Bernanke's speech will be less explosive this year than last.

There are a number of reasons for that view. First, the Fed has less room for manoeuvre now that US inflation has ticked higher, making QE3 potentially more dangerous than QE2. Second, the political pressure on Mr Bernanke personally has never been higher, after the Republican presidential candidate Rick Perry described quantitative easing as "almost treasonous" and suggested that Texans would treat the Fed chairman "pretty ugly" if he turned up in their state. Third, the Fed has just unveiled a major policy shift, its interest rate-setting Federal Open Market Committee (FOMC) having announced that it expects to keep official rates at zero until mid-2013, a statement that pushed long-term rates to their lowest levels since the Second World War. And fourth, the FOMC is more divided now than it has been since 1992, when philosophical rifts opened up over the ending of money supply targets as a policy tool.

Perhaps more than anything else, the reason to think Mr Bernanke will be cautious is that there is no clear view yet on how the US economy will perform into next year. The odds of the world's largest economy slipping back into recession have risen, and hopes that the first-half slowdown was simply due to the Japanese earthquake have been dashed. But while some economists are now speculating about a double-dip, many others still expect a modest rebound in the third and fourth quarters.

Handicapping Mr Bernanke's options in a note to clients yesterday, Barclays Capital senior economist Michael Gapen said he expected more subtle policies from the Fed in the coming months. "Despite what we see as an unpleasant trade-off, we expect the chairman to indicate that further policy options remain available should the economic outlook deteriorate further, including lowering the interest rate on excess reserves [which private sector banks hold at the Fed], additional asset purchases, and measures to increase the duration of the Fed's securities holdings."

The latter, which would involve replacing short-term government bonds acquired under QE2 with longer-dated securities such as 10-year or 30-year Treasuries, could help put downward pressure on those longer-term interest rates, the ones that really matter for loans like mortgages.

In short, what no one expects is that Mr Bernanke will hold up his hands and say: I'm done.

Fishing, hiking and central banking

* Anyone entering the town square in pretty little Jackson, Wyoming, has to pass under one of four giant arches made entirely from elk antlers. The air in the surrounding valley of Jackson Hole could not be fresher. It is a rural idyll, famed for its wildlife, fishing and hiking in surrounding mountains. You don't have to look any further than the sheer natural beauty of the venue to explain why it has become a fixture on central bankers' calendars.

This year's is the 35th economic policy symposium hosted by the Federal Reserve Bank of Kansas City, the Missouri-based branch of the US central bank, an event modelled after similar gatherings of economists and policymakers in Boston in the 1970s. Boston, lovely though it might be, could not compete.

The guest list is tightly controlled, with only the world's most powerful policymakers and influential economists invited, and the agenda, too, is a closely guarded secret. Being asked to speak here is a great honour – and Ben Bernanke, now chairman of the Federal Reserve, came to prominence in political circles when he presented a paper on why central banks should stay out of the business of pricking asset price bubbles.

Mr Bernanke's speech this Friday will be the main focus of the event, but Jackson Hole kicks off with dinner for guests the previous evening, and continues with discussions and presentations through the weekend. Central bankers including the European Central Bank president, Jean-Claude Trichet; Turkey's Erdem Basci; and the Bank of the England's deputy governor, Charlie Bean, will be in attendance. The rest of the world – traders, analysts, investors – may not be there, but we can all expect to be touched by the event.

PROMOTED VIDEO
News
video
Life and Style
tech
Sport
Jodie Stimpson crosses the finishing line to win gold in the women's triathlon
Commonwealth games
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
film
News
John Barrowman kisses his male “bride” at a mock Gretna Green during the Commonwealth Games opening ceremony
peopleBarrowman's opening ceremony message to Commonwealth countries where he would be sent to prison for being gay
Arts and Entertainment
Jamie Dornan stars as Christian Grey in the Fifty Shades of Grey movie
filmFirst look at Jamie Dornan in Fifty Shades of Grey trailor
Life and Style
Phillips Idowu, Stella McCartney and Jessica Ennis
fashionMcCartney to continue designing Team GB Olympics kit until 2016
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Sport
Shinji Kagawa and Reece James celebrate after the latter scores in Manchester United's 7-0 victory over LA Galaxy
football
Voices
voicesGood for Lana Del Rey for helping kill that myth, writes Grace Dent
Sport
Farah returns to the track with something to prove
Commonwealth games
Life and Style
fashion Designs are part of feminist art project by a British student
Arts and Entertainment
The Tour de France peloton rides over a bridge on the Grinton Moor, Yorkshire, earlier this month
film
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Junior Research Analyst - Recruitment Resourcer

£18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...

Senior Analyst - Financial Modelling

competitive: Progressive Recruitment: This really is a fantastic chance to joi...

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Business Anaylst

£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

Day In a Page

Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform
Climate change threatens to make the antarctic fur seal extinct

Take a good look while you can

How climate change could wipe out this seal
Should emergency hospital weddings be made easier for the terminally ill?

Farewell, my lovely

Should emergency hospital weddings be made easier?
Man Booker Prize 2014 longlist: Crowdfunded novel nominated for first time

Crowdfunded novel nominated for Booker Prize

Paul Kingsnorth's 'The Wake' is in contention for the prestigious award
Vladimir Putin employs a full-time food taster to ensure his meals aren't poisoned

Vladimir Putin employs a full-time food taster

John Walsh salutes those brave souls who have, throughout history, put their knives on the line
Tour de France effect brings Hollywood blockbusters to Yorkshire

Tour de France effect brings Hollywood blockbusters to Yorkshire

A $25m thriller starring Sam Worthington to be made in God's Own Country
Will The Minerva Project - the first 'elite' American university to be launched in a century - change the face of higher learning?

Will The Minerva Project change the face of higher learning?

The university has no lecture halls, no debating societies, no sports teams and no fraternities. Instead, the 33 students who have made the cut at Minerva, will travel the world and change the face of higher learning
The 10 best pedicure products

Feet treat: 10 best pedicure products

Bags packed and all prepped for holidays, but feet in a state? Get them flip-flop-ready with our pick of the items for a DIY treatment
Commonwealth Games 2014: Great Scots! Planes and pipers welcome in Glasgow's Games

Commonwealth Games 2014

Great Scots! Planes and pipers welcome in Glasgow's Games
Jack Pitt-Brooke: Manchester City and Patrick Vieira make the right stand on racism

Jack Pitt-Brooke

Manchester City and Patrick Vieira make the right stand on racism
How Terry Newton tragedy made iron men seek help to tackle their psychological demons

How Newton tragedy made iron men seek help to tackle their psychological demons

Over a hundred rugby league players have contacted clinic to deal with mental challenges of game