Bernanke to spotlight Fed policy options at Jackson Hole

WASHINGTON Mon Aug 27, 2012 12:48pm EDT

U.S. Federal Reserve Chairman Ben Bernanke reacts as he testifies before the House Committee on the Financial Services semi-annual monetary policy report on Capitol Hill in Washington, July 18, 2012. REUTERS/Jason Reed

U.S. Federal Reserve Chairman Ben Bernanke reacts as he testifies before the House Committee on the Financial Services semi-annual monetary policy report on Capitol Hill in Washington, July 18, 2012.

Credit: Reuters/Jason Reed

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke will keep markets guessing about the timing of another round of bond purchases when he speaks on Friday in Jackson Hole, but he is likely to sustain expectations for action of some kind next month.

Bernanke will address fellow policymakers at the Kansas City Federal Reserve's annual central banking retreat, held against the majestic backdrop of the Grand Teton mountains in Wyoming, at 8 a.m. Mountain Time (1400 GMT).

Markets are eying the speech for clues the Fed will unleash a third round of bond purchases to spur the sputtering recovery. Officials are frustrated by the lack of progress in reducing an unemployment rate stubbornly stuck above 8 percent and are fearful a shock could tip the economy into recession.

But analysts doubt Bernanke, who prefers not to front-run the central bank's policy-setting committee, will provide clarity on the Fed's plans for its next meeting on September 12-13.

This is one of two remaining gatherings before the U.S. election on November 6, guaranteeing any Fed action will be subject to intense political scrutiny during a tight presidential race in which the economy's health will be decisive.

"I'm not particularly confident there's going to be some big hint about the direction of policy," said Tim Duy, an economics professor at the University of Oregon who watches Fed policy closely. "We've already had a lot of chatter about this. He doesn't seem to like to signal too much in advance."

Minutes of the Fed's last meeting on July 31-August 1 made plain that officials are leaning toward easing monetary policy again unless the economy improves substantially.

Bernanke will likely match that rhetoric in his remarks at Jackson Hole, and detail what tools the Fed could use.

FED OPTIONS

The minutes released last week helpfully broke down the options, including the possibility of extending guidance on how long interest rates are likely to remain "exceptionally low."

The Fed slashed overnight borrowing costs to near zero in late 2008 and bought $2.3 trillion in government and housing-related bonds in two bursts of so-called quantitative easing.

Policymakers at the central bank have said they expect to hold rates steady through at least late 2014 but many analysts think the Fed will push that date into 2015 next month.

The minutes also showed that Fed officials were confident more bond buying would help support the recovery, and it foreshadowed the potential of a more conditional, flexible approach to purchases that could be tailored to future economic performance, as opposed to announcing a set amount up front.

Importantly, Bernanke is also likely to assess the signals from the U.S. economy in recent weeks.

Data since the Fed's last meeting have been somewhat better than expected but have fallen short of the sort of unambiguous upturn that the minutes indicated would be needed to stand officials down from providing the economy with more support.

A Reuters poll of economists on Friday put the chances of a third tranche of bond buying, or QE3, at the September meeting at 45 percent, but the vast majority of those surveyed expect the Fed to extend its rate guidance. <FED/R>

When Fed officials gather in September they will have passed some important milestones that could impact their decision.

The European Central Bank is expected to outline what it is willing to do to help buttress struggling euro zone economies at a meeting on September 6, which could give a lift to global financial markets.

The following day, the United States issues its count of nonfarm payrolls for August. Fed officials will want to see whether an acceleration in job growth in July was sustained.

In 2010, Bernanke used the annual Jackson Hole gathering, held in a rustic lodge in Grand Teton National Park, to hint at QE2, and some investors hope he will do the same this year.

But that has been the exception, not the rule, and markets could be disappointed.

"The record suggests that it is not a venue for major policy announcements," said JPMorgan economist Michael Feroli.

(This story corrects GMT time in second paragraph)

(Editing by Tim Ahmann and James Dalgleish)

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