Anxious markets seek boost from Bernanke at Jackson Hole

 

The US Federal Reserve chairman, Ben Bernanke, risks disappointing financial markets if a major policy speech today does not contain hints of additional monetary easing by the US central bank.

Mr Bernanke's annual address to the Federal Reserve Bank of Kansas economic policy symposium in Jackson Hole, Missouri, which opened last night, is being scrutinised this year as never before, but hopes that he might promise a new round of quantitative easing for the world's largest economy faded yesterday and dragged stock markets lower.

The symposium is also notable this year for the presence of two key players from outside the US: the International Monetary Fund's new managing director, Christine Lagarde, and the European Central Bank boss, Jean-Claude Trichet, who are expected to address the eurozone debt crisis that has also been weighing on markets.

The FTSE 100 closed last night down 1.4 per cent and the Dow Jones was trading down by a similar amount at lunchtime in New York, spooked by a new blow-up in interest rates on Greek government debt and a disappointing jobs report in the US.

Traders also appeared to be unwinding bets they had made earlier this week that Mr Bernanke would make an activist speech in Jackson Hole that could pump-prime markets, as he did last year when he unveiled the Fed's second round of quantitative easing (QE2). That $600bn bond-buying spree ended this June, since when economic data in the US has pointed to growing risks of a double-dip slowdown.

"Mr Bernanke is unlikely to fulfil the markets' hopes that he will pave the way for a third round of asset purchases (QE3) in his speech," Paul Dales, senior US economist at Capital Economics, said. "It is easy to make the case for more policy support based on the still high unemployment rate, the weakening economy and the recent turmoil in the financial markets. But the difference between now and last year is that the rebound in core inflation to a 19-month high of 1.8 per cent in July means there is no immediate threat of deflation. This is likely to prevent QE3 at least until core inflation starts to fall back early next year."

At its last monetary policy meeting this month the Fed promised to hold official interest rates at zero until mid-2013, a declaration that sent market interest rates tumbling to historic lows. Mr Bernanke is likely to reiterate his gloomy outlook for the US economy.

Initial jobless claims – that is, people signing on to benefits for the first time – rose by 5,000 to a seasonally adjusted 417,000 last week. Claims filed in the previous week were revised up to 412,000 from 408,000. Although the latest figure was inflated by 8,500 claims from striking workers at the telecoms firm Verizon, it was still disappointing. US unemployment, now 9.1 per cent, is now expected stay above 8 per cent into 2014.

Buffett bets on America

Warren Buffett is investing $5bn (£3bn) in Bank of America in a deal that echoes his $5bn bet on Goldman Sachs at the height of the financial crisis in 2008.

"It's a vote of confidence not only in Bank of America, but also in the country," the billionaire investor told CNBC. "All those people who think the world is going to end, I think they're wrong."

Mr Buffett's stake will pay him 6 per cent – or £300m – in dividends a year and he also gets the right, for the next 10 years, to buy up to 700 million ordinary shares at $7.14 each. BofA shares leapt 12 per cent to $7.82 on the news, netting him an instant paper profit of nearly half a billion dollars. Mr Buffett said he contacted BofA on Wednesday after dreaming up the idea in the bath.

Goldman Sachs paid Mr Buffett $5.6bn earlier this year to buy him out of a similar deal, with a 10 per cent dividend – which was earning him $15 a second in dividends.

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