Financial markets are divided over the course of U.S. monetary policy, putting pressure on Federal Reserve chairman Ben Bernanke to further clarify his outlook for the economy.
The price of gold jumped $27 (U.S.) to a record $1,272 an ounce Tuesday, a puzzling flight to safety because new data shows the United States economy is doing better than many analysts expected.
Some analysts said gold's allure was tied to speculation that the Fed would add monetary stimulus before the end of the year by purchasing hundreds of millions of Treasury securities, a move that could lead to inflation.
If that's so, then Mr. Bernanke could well be wondering what he has to say to clarify his thinking.
Last month, Mr. Bernanke said he stood ready to provide extra monetary stimulus if needed, "especially if the outlook were to deteriorate significantly." As central bank guidance goes, that's pretty strong. Apply it to the economic indicators released since Mr. Bernanke's Aug. 27 speech in Jackson Hole, Wyo., and it's difficult to see signs of deterioration, significant or otherwise.
The latest data suggest the U.S. economy is at least buoyant, if not getting a little stronger. Private employers added 67,000 jobs last month - not great but better than most Wall Street analysts were expecting. On Tuesday, the Commerce Department reported that retail sales rose 0.4 per cent in August, the second straight monthly gain. Commerce also said the value of business inventories rose 1 per cent in July, the biggest gain in two years.
Yet financial markets continue to gyrate on speculation over the Fed's next move.
Gold surged to a record on Tuesday amid predictions the Fed's policy setting committee will create money to buy Treasury assets, a strategy known as quantitative easing because it seeks to lower interest rates by boosting the supply of money.
Flushing the financial system with cash risks inflation, making gold an attractive hedge against higher prices. But it's not only gold bugs who were betting on Tuesday that the Fed will try quantitative easing. The U.S. dollar fell against all the world's major currencies, and Treasury bonds rallied as investors bet the Fed's policy will lower the yield on future issuance.
"It's not a bull market in gold. It's a bear market in paper currencies," said Ronald-Peter Stoeferle, an analyst at Erste Group Bank AG in Vienna.
On Aug. 10, the Fed's policy setting committee said it would invest the proceeds of expiring mortgage-related assets in Treasuries, a shift from its previous position of reducing the more than $2-trillion in assets that the Fed built up during its original quantitative easing campaign, an amount that is double what the central bank would typically keep on its balance sheet.
In Jackson Hole, Mr. Bernanke and his colleagues on the Federal Open Market Committee said that allowing the Fed's balance sheet to contract would have been inconsistent with clear evidence that the recovery was losing momentum. However, he said he still believed that the "preconditions" were in place for decent economic growth in 2011.
The Fed's next scheduled policy meeting is Sept. 21, and investors and economists will be watching eagerly to see how the Fed's outlook has evolved over the past month.
Some analysts, however, have already made up their minds.
Jan Hatzius, chief economist at Goldman Sachs, told reporters Tuesday on a conference call that he thinks the Fed likely will buy $1-trillion in Treasury securities in November or December. Mr. Hatzius reasons the Fed will be forced to act because it has a mandate from Congress to foster employment.
As government stimulus fades, Goldman Sachs predicts the U.S. unemployment rate will climb back toward 10 per cent from its current 9.6 per cent by early 2011 and stay there for most of the year.
That's one view. The other is that economic growth will be just fast enough to create a steady, if underwhelming, flow of new jobs. Paul Ashworth, an economist at Capital Economics in Toronto, said he expects the U.S. economy to "stagger" along at an annual growth rate of about 2 per cent, which should be enough to keep the job creation steady.
"I don't think it's inevitable," Mr. Ashworth said of quantitative easing.