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
Tuesday 23 August 2011
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.
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