Pressure grows on Federal Reserve chief to come clean on QE plans

By PETER RANSCOMBE
Published on 26/08/2012 00:00

FEDERAL Reserve chairman Ben Bernanke will come under increasing pressure this week to provide “clear guidance” over whether further stimulus will be pumped into the world’s biggest economy.

Markets want Bernanke to use his annual speech to a gathering of central bankers at Jackson Hole in Wyoming, to clarify if and when further quantitative easing (QE), or money printing, will begin.

Republican presidential candidate Mitt Romney ratcheted up the pressure on Bernanke last week by revealing he will replace him as chairman if he wins the election in November.

While Romney thinks a third round of QE should be avoided, markets are yet to be convinced that America’s recovery is strong enough, especially given the effect the Eurozone debt crisis is having on the rest of the global economy. Minutes of the latest Federal Open Market Committee (FOMC) meeting, published last week, suggested stimulus could come “soon”.

But committee member James Bullard branded the minutes “stale” because the meeting preceded upbeat economic figures on US jobs, housing and manufacturing.

Fellow rate-setter Charles Evans took a more “dovish” stance, arguing that the case for a further injection of cash into the US economy remains intact despite positive data.

Ian Williams, an analyst at Peel Hunt, said: “Mixed messages provided by the FOMC minutes and comments from Fed members have confused the markets, making it all the more important Bernanke provides clarity in his speech.

“Unfortunately, with the main event at the end of the week, there is scope for further uncertainty, especially with no detail about Eurozone measures likely before September.”

Mike van Dulken, head of research at Accendo Markets, pointed out that Bernanke used 2010’s meeting to launch “QE2”, America’s second wave of quantitative easing.

“The market’s desire for some extra help remains ravenous,” van Dulken said.

“Markets have been waiting for Fed stimulus for months. The trouble is US economic data is neither bad enough to panic him to act, nor good enough for markets to believe it isn’t necessary and we’re on the road to recovery.”

In Britain, credit and lending data due to be published by the Bank of England on Thursday will provide an insight into whether QE is having an effect on the economy.

Rob Harbron, an economist at the Centre for Economic and Business Research, said Friday’s gross domestic product revision for the second quarter – which said the economy contracted by 0.5 per cent rather than 0.7 per cent – did not alter the case for more QE.

Harbron said: “We expect the BoE to provide £50 billion more QE after its current round of asset purchases.”

On Friday, BoE monetary policy committee member Martin Weale reiterated that interest rates were unlikely to be lowered, because doing so would deprive high-street banks of funding.