THE dollar had a roller coaster ride yesterday as Federal Reserve chairman Ben Bernanke gave an indication that a third round of quantitative easing could be on the cards. Speaking at the National Association for Business Economics Conference in Washington, DC, Bernanke stated that, though there has been some strengthening of labour market conditions, long-term unemployment was here to stay. At the conference he said that: “While both cyclical and structural forces have doubtless contributed to the increase in long-term unemployment, the continued weakness in aggregate demand is likely the predominant factor.” He then followed this up with the phrase that got gold bugs sweating: “Consequently, the Federal Reserve’s accommodative monetary policies, by providing support for demand and for recovery, should help, over time, to reduce long-term unemployment as well.”
READING BETWEEN THE LINES
It is hard to argue that Helicopter Bernanke is not open to further stimulus measures. He fundamentally believes that his role is lever-puller in chief of the markets. The question is how? When? And under what conditions? The most likely mooted measure from the central bank is QE3 but with Fed purchases of Treasuries and mortgage-backed securities sterilised using reverse repos and longer-dated Treasuries in order to try and combat the inflationary effects of the measures. For the question of when, there is some disagreement between St Louis Fed chairman James Bullard – a full voting member of the Federal Open Market Committee (FOMC) – and Bernanke. Both advocate a helicopter drop of freshly printed dollars should economic conditions deteriorate. But while Bernanke’s recent language indicates that he would rather maintain current Fed policy unless there was a sharp drop off in macro conditions, Bullard has been vocal in his view that the Fed needs to be ready to catch things as conditions turn. Speaking on US monetary policy to the annual Credit Suisse Asian Investment Conference in Hong Kong last week, Bullard said that this ought to be considered a turning point and that “the FOMC has been criticised historically for overstaying policy stances that might have made sense at one juncture but are no longer appropriate as macroeconomic conditions change.”
The morning comments from Bernanke pushed gold towards the psychologically important $1,700 point, topping out at $1,698.50. But this move in reaction to QE3 anticipation was reversed as US consumer confidence figures came in close to a one- year high in March. However, it is actions, not just the threat of them, that matter to the long-term strength of the dollar. If Bullard wins the intellectual battle of interventionist monetary policy with Bernanke, then QE3 in one form or another will come sooner rather than later. And there is a reason why markets are spending so much time reading between the lines – if QE3 does materialise, it will steamroller the dollar’s bullish run and drive gold $2,000 an ounce-bound.