Jackson Hole!

On Friday, the markets will focus only on one event: the Fed chief - Ben Bernanke’s speech in Jackson Hole. A year ago, during that summit, Bernanke announced the launch of the second program of quantitative easing monetary policy (QE2). Investors hope that, given the weakening economic growth in the U.S., which correlates with similar trends observed in Europe and to some extent in Asia, as well as the risks posed by the debt crisis in the euro area, Bernanke will again announce new measures to promote the growth.

However the probability of the third round of the quantitative easing of monetary policy (QE3) seems to be very low, because of the following factors:

1. Rate of inflation remains at a high level. In July, the CPI was 3.6% y/y, and the core CPI 1.8% y / y. In mid-2010 inflation was falling, which together with the economic slowdown created a threat of deflation.
2. QE2 did not significantly support the labor market. Over the last year the unemployment rate fell from 9.6% to 9.1%.
3. QE2 did not improve the difficult situation on the U.S. housing market.
4. The Fed is not unanimous. In August, Richard Fisher ,Narayana Kocherlakota and Charles Plosser voted against the decision of the FOMC to keep interest rates at record lows (0,0-0,25%) until at least mid-2013.
5. Market interest rates in the United States remains relatively low.
6. S & P500 index, despite the August sell-off, remains higher than last year.
7. QE2 met with critical voices of politicians from the Republican Party. QE3 could trigger a much larger wave of criticism.
8. QE2 has led to strong growth in commodity prices, which is now a drag on the global economy. Their further growth, after the announcement of QE3, can hurt the global economy even stronger.

As proved above, the current situation is not only completely different than a year ago, when Bernanke announced QE2, but also the positive economic effects of second round of buying bonds are arguable (market effects are undisputed). So what can he say, in order not to disappoint the markets? It seems that once again he may emphasize strongly that interest rates will remain low until mid-2013. He can also announce so-called “operation twist” (flattening the yield curve by selling short-term bond and buying long-term one) and inform about the tools to support economic growth, discussed at the August meeting of the FOMC.

Events to watch

In Friday's calendar, in addition to the scheduled at 16.00 CET Bernanke’s speech, markets will watch the publication of the revised data on the GDP of Great Britain and the U.S. for the second quarter of 2011.

Paweł Kordala

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