* Fed chief to keep high bar for third round of QE
* Mixed economic data a hurdle to more bond buying
* Euro mess is worry for Fed; Spain bank rescue in spotlight
By Alan Wheatley, Global Economics Correspondent
LONDON, July 15 Federal Reserve Chairman Ben
Bernanke serves up a new set of clues this week that might help
solve one of the thorniest riddles for the world economy: what
will it take to make the U.S. central bank ease monetary policy
Bernanke will present his semi-annual monetary policy report
to Congress on Tuesday and Wednesday against a background of
lacklustre growth at home and a festering sovereign debt crisis
in Europe that is increasingly preoccupying U.S. policymakers.
But investors will be lucky if Bernanke goes much further
than the minutes released last week of the Fed's June 19-20
policy meeting. The central bank kept open the option of a third
round of outright bond purchases, or quantitative easing (QE) in
market jargon, if the economy took a marked turn for the worse,
but appeared to set a high bar for such aggressive action.
"Right now the economic numbers are very mixed so I don't
think Bernanke can make a clear, compelling commitment on QE at
the current time," said David Hale, who runs a global economics
consultancy in Winnetka, Illinois.
Growth might have been as soft as 1.5 percent in the second
quarter, Hale said. But he also pointed to falling unemployment
claims in recent weeks as well as a bounceback in auto sales and
durable goods. Some forecasters were penciling in a pick-up in
growth this quarter to an annual rate of 2.5 percent or 3.0
percent, he noted.
"So the situation is far too unclear," Hale said. "I think
all he'll do is keep his options open and see what the economy
looks like in September."
This week's batch of U.S. economic data is unlikely to tip
the scales one way or the other.
The first regional industry surveys for July, from New York
and Philadelphia, are forecast to show a modest improvement;
retail sales for June are expected to have edged up 0.1 percent
on the month; headline inflation in the year to June probably
ticked down to 1.6 percent but economists see no deflationary
risk that could push the Fed off the fence.
If the economy does stumble or market confidence collapses,
the Fed's initial response is likely be to indicate that
interest rates, now expected to stay close to zero at least
through late 2014, will remain exceptionally low for even
Vince Reinhart, Morgan Stanley's chief U.S. economist,
believes the Fed's decision last month to buy an additional $267
billion in long-term bonds with proceeds from short-term debt -
a measure known as Operation Twist - effectively puts the
central bank's balance sheet on auto-pilot for the rest of the
"We think their first recourse will be to tweak their
language about interest rates. From their perspective, a modest
disappointment requires, at most, a modest policy response,"
Reinhart, a former senior Fed staffer himself, said in a note to
EURO ZONE WOES
The wild card is the crisis enveloping the euro zone.
Speaking in London last week, St Louis Fed President James
Bullard listed a number of domestic impediments to U.S. growth.
"But even more pressing is the situation in Europe. The
crisis is contributing to recession, adding a dragging factor on
U.S. and Asian performance. There is a financial sector
dimension which periodically threatens to expand into a more
generalised financial crisis," Bullard said.
After Italy successfully navigated a bond auction on Friday
despite a two-notch credit rating downgrade from Moody's
Investors Service, the next such financial test of the euro zone
comes on Thursday when Spain is due to tap the bond market.
Thanks to an agreement in principle to bail out Spanish
banks to the tune of up to 100 billion euros ($122
billion)without adding to the state's debt, yields on 10-year
Spanish bonds have fallen back from the 7 percent level widely
deemed to be unsustainable.
Euro zone finance ministers will gather on Friday to put
flesh on the bones of the Spanish deal, clinched in return for a
further 65 billion euros in tax increases and spending cuts
announced by Madrid last week.
Confirmation by ministers that the euro zone's rescue fund
would not be paid out ahead of other creditors should Spain
default would be a relief for bond investors. The losses imposed
on private owners of Greek debt, while the official sector was
spared, has accelerated a flight from the bonds of other heavily
indebted countries such as Italy and Spain.
But many questions are likely to linger about the plan to
help Spain, not least because the bailout is linked to plans for
euro zone-wide supervision of the 17-nation area's biggest banks
- a politically and technically fraught undertaking that will
take months of preparation.
Gianluca Ziglio, an interest rate strategist at UBS, said
the bank rescue was positive because Spain was relying on
domestic buyers to refinance its debts.
"If you underpin your banks you are able to buy time. But in
my view it will be just buying time. It's difficult to see how
Spain can actually avoid a full-blown bailout," he said.
And, as Ben Bernanke knows all too well, that could touch
off a financial tsunami that would hit economies far beyond