What Bernanke might dig up at Jackson Hole

WHEN Ben Bernanke makes his speech at the Jackson Hole symposium on Friday, the markets will be hanging on his every word. Helicopter Bernanke picked up his nickname after referring to a Milton Friedman statement about using a helicopter drop of money to fight deflation, and market watchers will be listening for any sign that the Fed chairman will again be dropping money onto the fire of US financial worries.

It is important to note that the Jackson Hole event is not an FOMC meeting, and so Bernanke will not announce de facto Federal Reserve monetary policy. However, the speech is a key gauge of his intentions. At the Wyoming event last year, the Fed chairman first indicated that he intended to fire up the printing presses for a second round of quantitative easing (QE). So are we going to have to brace ourselves for QE3?

It is plain to see why many are braying for a flood of more cheap money into the economy. It would push up the prices of assets, including equities and commodities. While more cheap money sloshing around may be good news for vested interests, including those who own and want to sell such assets, it is not such good news for the US economy as a whole.

“I give it a 40 per cent chance that Ben Bernanke will announce something out of the ordinary this Friday,” says Alejandro Zambrano, market strategist at FXCM, pointing out that many had expected it to happen earlier.

The sticking point for those licking their lips in anticipation of cashing in on another payday thanks to Ben Bernanke and his FOMC colleagues is that of deflation.

In the past, deflation has been seen as a prerequisite in the justification of money printing by the Fed. And dissecting the remains of the US economy, the aruspices suggest that QE could be ruled out for the time being. “Last year, core measures of inflation – the Fed’s core indicator, which excludes volatile food and energy prices – were around 1 per cent and falling, and are now at 1.5 per cent and rising,” says Chris Beauchamp, research analyst for IG Index. “Core inflation is the Fed’s preferred indicator, and if this is not flashing a deflation warning then it will be reluctant to risk ever-higher inflation with QE.”

QE isn’t the only move in the Fed’s repertoire. It may consider a repeat of the Fed’s 1961 tactics to address public debt worries. Dubbed “Operation Twist”, the Fed tried to flatten the US yield-curve by buying long-term Treasuries and issuing short-term bills to mop up the liquidity created. “This is seen as less like political suicide for the Fed, as they can avoid accusations of printing money,” says Nick Beecroft, senior markets consultant at Saxo Bank.

Minutes from the FOMC seem to back up the prediction that QE3 is unlikely, with three board members dissenting – a big number for the FOMC, which usually likes to rely on consensus – the biggest for 18 years. But one should not underestimate Bernanke’s sense of his place in history. “We need to take into account the way that Bernanke sees things,” says Beecroft. “Do not forget that when he talks about Japan’s lost decades he thinks that it was due to insufficient monetary stimulus – too little, too late in terms of printing and asset buying.” He adds that Bernanke’s personal stance increases the chance of a central bank intervention. “His legacy is on the line. We constantly fail to understand how bureaucrats and politicians will do anything, and I mean anything, to keep the illusion going.”

So what can we expect in the lead up to Bernanke’s big day? Until the Fed chairman dismisses the prospect of the printing presses being fired up on Friday, the dollar is going to be on the back foot. “Until Friday afternoon, we could witness the dollar fall to a record low versus the Japanese yen in the anticipation that the Federal Reserve will signal more stimulus measures to revive the slowing US economy,” says Yannick Naud, portfolio manager at Glendevon asset management. But whatever the outcome of the symposium, investors may dive for cover in safe-haven currencies. “Because of growing concerns that the EU’s sovereign debt crisis could now turn into a run on European banks, we should not expect in the medium term any weakening of the demand for safe-haven assets – mainly gold and Swiss franc – with or without QE3”

And as Beecroft points out, you should never underestimate a public figure’s desire to build a monument to himself, regardless of what those around them may be saying.