Jobless claims, GDP, consumer sentiment … all meaningless as the Bernanke speech at 9 a.m. CST takes precedence. The financial world awaits to hear if the FED CHAIRMAN will deliver another gift like last August’s Portfolio Balance Channel speech. While QE2 did not commence until November, the groundwork was laid in August and the plan delivered at the September FOMC meeting. The markets well understood that the intent of Jackson Hole precipitated the equity market rally that began in September.
The recent sharp correction in the global equity markets has lent credibility to the argument that Bernanke will deliver another gift to the equity markets and provide the fuel to raise stock prices. While some analysts anticipate a QE3, others are predicting a replay of either a “twist” or else an effort to cap the long end of the CURVE. Both efforts have been used before as the FED capped long rates during the 1940s and effected the curve in the early 1960s. While these tools are certainly available to the Bernanke FOMC, I doubt that the Fed chairman will use either of these methods or begin a new QE program for it would be a waste of monetary power that may be needed in the future.
The FED has already announced its plan of holding overnight rates at close to zero for the next two years making the twist unlikely as raising short rates to twist longer rates lower would undo the effort to hold rates low on the short end. The tool to hold long rates below a proscribed level could work but is unnecessary at this juncture as notes and bonds are already very low. QE3 would bring criticism from many high level analysts and the FOMC already had three dissenting votes at the August 9 meeting. Also, Mr. Bernanke has to be leery that RON PAUL HAS LEGISLATIVE OVERSIGHT OF THE HOUSE SUB-COMMITTEE TO WHICH THE FEDERAL RESERVE HAS TO ANSWER.
I am not discussing the rantings of Texas Governor Rick Perry, I am referring to Ron Paul who has real power to make Bernanke accountable and miserable. It seems that the FOMC took the high road in its last statement by taking an aggressive stance for a defined period and thus putting the responsibility on the executive and legislative branches to affect a credible stimulative policy. It is time for Bernanke to free himself and the FED from the “GREENSPAN PUT” and allow FED policy to work and to stop being concerned with the stock market. If Bernanke avoids the “PORTFOLIO BALANCE CHANNEL” discussion, it will be a breath of fresh air for monetary policy. Hey BEN, turn off CNBC and enjoy the beauty of the Grand Tetons. The machinations of Wall Street will always be with us.
Quick Hitter: The most important speech my well be delivered on Saturday by Jean Claude Trichet. The ECB president has made two mistakes by raising overnight rates during the European credit crisis. As the equity values of Europe’s banks have been crushed and the fear of a Lehmanesque type of banking debacle rising, it will be important to hear if Trichet has any plans to aid the troubled banks by moving to push for a higher level of money for the EFSF.The buying of troubled sovereigns by the ECB also needs to be enhanced so as to remove funding pressures arising from greater haircuts on the troubled sovereigns. I am sure that Trichet is getting an earful from the gathering of the world’s top monetary policy makers. Will Trichet attempt to raise his stature as he nears the end of his ECB Presidency. November 1 is quickly approaching.
Quick Hitter Two: If Bernanke stands pat I believe it will be necessary to see what levels of support hold for equities. Does the DOLLAR get a rally as QE3 does not materialize and the focus returns to Europe? And, of course, how will the barometer of global angst, GOLD, react to no more QE. If GOLD were to continue this weeks selloff, then we will know that the latest leg up in GOLD was to the immediate fears of a new QE plan. However, if Trichet were to deliver a major speech on ECB plans of increased bond purchases, GOLD will have a new impetus to reassert its safe haven status.