As pundits and politicians focus on the Republican convention in Tampa and the upcoming Democratic confab in Charlotte, economists will be riveted on Friday by a much more low-key gathering taking place in the Grand Tetons: the annual monetary policy symposium, where Federal Reserve Chairman Ben Bernanke will speak about the aftermath of the worst economic crisis since the Great Depression.
Markets are eager for clues on whether the Fed is ready to carry out another round of bond-buying to help the ailing economy. At the Jackson Hole, Wyo., gathering of top policymakers and economic experts from around the world, Bernanke will probably steer clear of signaling the timing of potential moves or committing to specific actions. (His speech is scheduled for 10 a.m. EDT.) But the address, entitled “Monetary Policy Since the Crisis,” will provide important insights about the central bank’s assessment of the economy and threats looming on the horizon from the European crisis and from year-end tax increases and automatic spending cuts known as the “fiscal cliff.”
Here are five things to watch in Bernanke’s speech:
1. THE CURRENT STATE OF THE ECONOMY AND INFLATION. The Fed has a dual mandate of combating inflation and promoting maximum employment. Inflation as measured by the Consumer Price Index was running at an annual rate of 1.4 percent, below the central bank’s target of 2 percent. A slew of data has underscored that the economy and jobs growth remain anemic, a fact the Fed underscored in the “minutes” of its July 31-Aug. 1 meeting. The minutes said that Fed policymakers were prepared to act “fairly soon” if there was no “substantial and sustainable strengthening in the pace of the economic recovery.”
Economist and Fed watcher Ethan Harris of Bank of America Merrill Lynch said the economy's prognosis has changed very little since the central bank’s last meeting. “They are concerned about the economy. They want to do more to help the economy, but they’re still trying to decide what policy sequence they are going to follow.”
The Fed next meets Sept. 12-13.
2. TOOLS. With short-term interest rates at or near zero, the Fed has turned to unconventional means, such as purchases of government debt securities known as “quantitative easing” or QE. Many economists think the Fed could well undertake a third round of bond buying—QE3—by the end of the year. Some see a possibility of action at the next Fed meeting, but other economists say the Fed might be more likely to wait.
There are other means the Fed could use to try to give the economy a lift, such as promising to maintain low interest rates for a longer period of time.
3. EFFECTIVENESS OF QE. Any assessment of the effectiveness of the Fed’s bond-buying program would provide clues as to how likely the Fed is to turn to that policy lever again in the near future.
“I do not expect him to give a clear signal that, yes, we’re doing it and it’s coming in September,” said Lewis Alexander, chief U.S. economist at Nomura Holdings. But Alexander said that if Bernanke says he thinks QE has been effective, that could reinforce expectations of Fed action, particularly if the Fed chairman also indicates he believes inflation is likely to remain low and that he remains very concerned about the health of the economy.
4. FISCAL CLIFF. In testimony before Congress in July, Bernanke warned of dire risks to the economy from the fiscal cliff. He could use the speech to underscore the warnings. The Congressional Budget Office has warned that a failure to resolve the fiscal standoff could lead to a deep recession, sending unemployment up to 9.1 percent in 2013.
5. EUROPEAN CRISIS. Bernanke and senior Treasury officials stay in close contact with their European counterparts. Any escalation of the crisis could also push the Fed into action. The initial program for the Jackson Hole symposium was supposed to include remarks by European Central Bank President Mario Draghi, but in a sign of intensifying concerns over the crisis, a spokesman for the ECB said he would not attend the economic gathering due to a "heavy workload."