Ben Bernanke has a lot of hype to live up to this week when he delivers a speech from Jackson Hole, Wyo., the Federal Reserve chairman's grandest stage.
This week's economic calendar is packed, bringing a revised estimate of U.S. economic growth, new data on household consumption and fresh inflation numbers. Yet what Wall Street cares about most is Mr. Bernanke's speech at the Kansas City Fed's annual economic symposium, where his yearly speeches have attained mythic status – a status that has thrown a deep divide between economists who feel the real value of the talks have been exaggerated, and Wall Street, which tends to create its own reality.
And Wall Street has indeed decided that Jackson Hole matters, and the scrutiny will be intense: On Friday, Bloomberg Television was promoting its plan to deliver live coverage from the Jackson Hole "Crisis Conference," which also features a speech by European Central Bank President Mario Draghi.
So what might Mr. Bernanke say to live up to the hype? If his last couple of speeches are any indication, it will have to be substantial. In 2010, with the recovery faltering, Mr. Bernanke used his appearance at this mountain resort to presented a menu of policy options that included a new round of bond buying. Markets rallied on the prospect of more quantitative easing, betting that its inclusion in Mr. Bernanke's speech was an indication that QE2 was on the way. In November, the Fed said it would create $600-billion (U.S.) to buy government bonds.
Last year, Mr. Bernanke didn't go into specifics about new policy measures, but he did acknowledge that economic growth was "much less robust than we had hoped," and announced that the next meeting of the Fed's policy committee would be two days instead of one. At the end of that extended meeting, on Sept. 21, the Fed said it would sell $400-billion (U.S.) of short-term securities to buy longer dated assets, the program that would come to be known as "Operation Twist."
He will be hard-pressed to do better than the minutes of the Federal Open Market Committee's July 31-Aug. 1 meeting, which were released last week with the usual three-week lag. The official synopsis of the meeting showed policy makers were more predisposed to further monetary stimulus than many on Wall Street had thought, stating that "many" officials reckoned additional measures "likely would be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery."
Economists and investors now are desperate to know what the Fed means by "substantial and sustainable."
Economic data has been stronger since the policy committee met. Hiring picked up in July, and retail sales broke out of a second-quarter slump last month. But there also are negatives, including an increase in the July unemployment rate to 8.3 per cent from 8.2 per cent and evidence that factory production is slowing.
Ahead of the Fed's next policy meeting in September, there will be another employment report, readings on consumer confidence, household income, and purchasing by factories and non-manufacturing companies. Many economists say those data will determine whether the Fed announces new stimulus measures next month. "It is hard to overstate the importance of these reports," said James Marple, a senior economist at Toronto-Dominion Bank in Toronto.
Mr. Bernanke could use Jackson Hole to provide some guidance on the Fed's threshold for action. He could also take inspiration from 2010 and discuss the merits and drawbacks of various policy options.
The Fed minutes indicate that many officials favour extending the central bank's conditional promise to keep borrowing costs low beyond the current commitment of at least to the end of 2014. There also appears to be significant support on the committee for a third round of bond buying, so much so that economists at Bank of America Merrill Lynch say there is an 80-per-cent probability that the Fed will deploy QE3 before the end of the year.
With that sort of anticipation, Mr. Bernanke will know that he risks deflating financial markets if he fails to deliver. The one certainty is that he will choose his words carefully. That's because Mr. Bernanke's record at Jackson Hole isn't as strong as recent years suggest. In 2007, amidst the first tremors of a financial crisis that would force the Fed to rescue some of the biggest financial institutions, Mr. Bernanke declared: "It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions." Whoops.