Friday, August 26, 2011

US economy: Ben Bernanke to give high profile speech

The head of the US central bank, Ben Bernanke, is preparing to give a key speech that will be closely watched by markets for any hint of new stimulus.
He will speak at a meeting of central bankers in Jackson Hole, Wyoming.
Last year, his speech paved the way for $600bn (£368bn) of quantitative easing - injecting cash into the financial system to try to boost the economy.
This year, with the US again slowing sharply, markets are speculating that further QE may be round the corner.
Market anticipation Shares have rallied all week in anticipation that the Federal Reserve will act to reinvigorate the US recovery.
Earlier this month, stock markets plummeted as economic data pointed to sluggish or virtually non-existent growth in the US and Europe.
"Recent events have made it blatantly clear that the economy is in a funk," says Paul Dales, senior US economist at Capital Economics.
"The housing market remains at rock bottom and even the manufacturing sector, which had been the shining light of this recovery, has come off the boil."
Gold also hit a new record high on Tuesday, before falling back as stocks rallied.
Investors see gold as a haven in times of economic uncertainty, and QE is expected to depress the value of the dollar versus gold, which also makes the precious metal more attractive.
Limited options

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Fiscally, the US is doing exactly the wrong thing”
David Blanchflower Economist and former Bank of England policymaker
Mr Bernanke is not expected to make any major announcements in his speech.
But last year, unable to cut short-term interest rates any further, Mr Bernanke used his speech to lay out the Fed's alternative policy options.
Markets - correctly - took this as a signal that a second round of QE was imminent.
This year, Mr Bernanke's policy options to try to try to boost growth are seen as more limited.
Most, including QE, work primarily by lowering longer-term cost of borrowing.
But government borrowing costs are already at post-World War II lows, leaving little room to fall further.
Earlier this month, the Fed tried another ploy - announcing that it expected to hold short-term rates at zero until 2013.
But it had little effect, as two-year interest rates were already close to zero.
Japan

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Printing more money to play politics at this particular time in American history is almost treacherous, treasonous in my opinion”
Republican presidential candidate Rick Perry Speaking on 15 August
Some analysts think Mr Bernanke may choose to stay tight-lipped this year.
"Policy changes are the job of the [Fed's policy setting committee] as a whole - not the chairman alone - three of whom voted against the August statement on interest rates," says Mr Dale at Capital Economics.
"The committee has become more sceptical about the merits of QE. Some members seem concerned that it boosts commodity prices."
Moreover, inflation is somewhat higher than last year, knocking away a key argument for the previous round of QE.
Twelve months ago, price rises had slowed almost to zero, and the chairman made clear that the Fed would strongly resist falling prices.
Deflation - a feature of Japan's 20-year stagnation - encourages people to postpone spending, and makes debts harder to pay off.
'Only game in town'

Dow Jones Industrial Average

Last Updated at 25 Aug 2011, 20:05 GMT Dow Jones twelve month chart
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Top loser

Caterpillar Inc.

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But many economists question whether QE is effective, after the most recent round failed to spark a sustained recovery.
They fear the US is stuck in a "liquidity trap", in which nobody wants to spend more money, no matter what the Fed does.
Overindebted US households are likely to freeze their spending for many years.
And this gives banks and companies little incentive to invest in new production, preferring to hold cash even if it pays no interest.
Keynesian economists say the federal government should use its ultra-cheap borrowing rates to spend more and lift the economy out of the trap.
But instead, Congress is now determined to cut government spending.
"Fiscally, the US is doing exactly the wrong thing," economist David Blanchflower, a former member of the Bank of England's Monetary Policy Committee, told BBC News.
"The US faces a liquidity trap. [The federal government] should be doing huge fiscal stimulus [raising spending] to reverse that problem.
"But they're not. So monetary policy is the only show in town."
Some politicians have also been critical of the Fed's policy, with Republican Texas governor and presidential hopeful Rick Perry describing the possibility of further injections of cash as "almost treacherous, or treasonous".
"We've already tried this. All it's going to be doing is devaluing the dollar in your pocket and we cannot afford that," ABC News reported him as saying.
"We have to learn the lessons of the past three years that they've been devastating," he said.

http://www.bbc.co.uk/news/business-14644827
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