Will Fed Chairman Bernanke Unveil QE3 at Jackson Hole?

ForexNewsNow | Published on August 26, 2011 at 6:44 am

fed-chairman-US-federal-reserve-ben-bernanke-qe3NEW YORK (ForexNewsNow) – Fed Chairman Ben Bernanke faces a vast array of hopes, expectations and interests as he prepares to deliver his highly anticipated speech at the Jackson Hole economic conference on Friday. Bernanke’s speech is scheduled to begin at 14:00 GMT and will be a crucial determinant in global market confidence over the next few months. Yet most analysts now believe that the Fed chairman will not announce the beginning of another round of quantitative easing, QE3, during his speech.

Current Predictions

Instead, the widely held prediction is that the Fed Chairman will attempt to reassure markets verbally and offer a series of symbolic steps in an attempt to stabilize the economy and show that the Federal Reserve is willing to move in to support the troubled economic recovery. For many, the current prediction is a massive disappointment. Markets jumped over the past week, fueled by speculation that the US Federal Reserve would take strong action to re-intervene in the economy and jump-start the recovery with a third round of quantitative easing.

Now that the Fed’s steps are being viewed as increasingly small and symbolic, the markets may take a steep dive. Analysts agree that the previous round of quantitative easing, QE2, did not meet its intended goals. Overall The QE2 policies did little to stimulate the economy and contributed to the sharp rise of inflation in the US economy – exactly the opposite of what the Federal Reserve chairman was hoping for. The dismal performance of QE2 has many analysts questioning whether Bernanke even has more room to maneuver or if the scope of the Fed’s abilities has essentially ended.  While the Fed may attempt to buy bonds a bit further out to maturity, it is difficult to see how this could drastically change the current economic balance for the better.

Influence of US Domestic Politics

Added to the mix, the US political system is currently in a state of turmoil and remains unable to effective respond to the economic crisis. As both the Republicans and Democrats gear up for the 2012 Presidential Campaign, both parties are under intense pressure to keep a hardline on their ideological differences in an attempt to look strong before the elections. This offers the political system very little room to maneuver and negotiate during a critical time in America’s economy.

The rise of the Tea Party movement, and the presidential campaign of Tea Party favorite Rick Perry, has dealt another blow to the flexibility of the US political-economic system, as Perry continues to take a hard-line against the Fed’s QE2 policies. Mr. Perry even went as far as to launch a veiled threat against Bernanke’s policies, saying that it would be “treasonous” if Bernanke chose to engage in renewed quantitative easing before the US elections and claiming that the Federal Reserve Chairman would be treated “pretty ugly down in Texas”.

QE3 In The Near Future?

Despite the dashed hopes for a third round of quantitative easing, influential economist Nouriel Roubini told CNBC on Thursday that he believes a third round of quantitative easing by the Federal Reserve is coming before the end of the year.

Roubini was quoted as saying, “The reality is we`re heading toward recession, and one of the few policy bullets [the Federal Reserve] has left is monetary policy or QE3.” In his opinion, it does not matter whether or not Fed Chairman Ben Bernanke announces another round of quantitative easing on Friday, since he believes it will be a reality later this year. Roubini also noted that during the last Federal Open Market Committee meeting the Fed “discussed wide range of other options if the economy weakens” and further weak data could “be the trigger” for the Fed to take action at its next meeting on September 20th.

So while it appears that QE3 is off the table during the Jackson Hole conference, it is clear there is still a good chance QE3 will be back on the table in the very near future.

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