Eyes turn to Ben Bernanke's annual meeting at Jackson Hole
On Friday 26 August at 14:00 GMT investors around the world will tune in to hear the speech of Ben Bernanke, Chairman of the Federal Reserve, at the US central bank's symposium at Jackson Hole
Investors will expect Bernanke to speak about the US economy but this will be a challenge for him as the US is experiencing a sluggish growth rate which, if not addressed soon, will certainly increase the risks of the country sinking back into recession. The Jackson Hole symposium is perceived as an opportunity for the central bank to reflect on how the economy has performed during the past year and, after the second round of quantitative easing ended in June 2011, Fed policymakers were hoping that the economy would now be recovering from the financial crisis without further monetary intervention required. However, instead of recovering, the economy has slowed further. Unemployment is still at worryingly high levels, consumer spending, manufacturing and the housing market are stubbornly weak and, to make matters worse, the US is suffering from high debt levels which lead to the US losing its AAA rating.
Most importantly the global markets will be focusing on what Bernanke has to say about monetary policy. Will the Fed come to the rescue again with another round of quantitative easing? Investors are wondering whether Bernanke's words will be a repetition of last year's meeting where he expressed the need for more quantitative easing. In August, Bernanke announced that the central bank plans to keep interest rates unchanged near zero levels until at least the mid-2013.
The second piece of news expected on Friday will be a revision of the second quarter Gross Domestic Product(GDP). Speculators argue that GDP will show a downward revision to 1.1% emphasizing the country's anemic level of growth.
In the scenario where the Fed announces or signals further monetary stimulus it is likely that we may see some volatile movements in the currency and stock market. The dollar's fate is determined on the presence of further quantitative easing and in a scenario such as this, the US dollar may suffer large losses, gold may continue its recent run to fresh highs and the stock market may gain supported by a short term rise in risk appetite.
Quantitative easing involves the injecting of a large amount of US dollars into the financial system in order to stimulate economic activity and growth. However, such programs pose risks and an increase in money supply into the economy may contribute to inflationary pressures. Given the July rise of the US Consumer Price Index to 0.5%, monetary easing at this stage may not be such a wise decision. With a sluggish growth rate and rising inflation, a third round of quantitative easing is certainly not an easy decision for the Federal Reserve. The second scenario is that Bernanke may not go as far as announcing further monetary easing which may result in a stronger US dollar, a fall in commodities and losses in the stock market. In either scenario a high level of volatility is expected.
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