August 18, 2011
Fed may have bullets left, but are they blanks?
When Federal Reserve Chairman Ben Bernanke takes the podium next week at the central bank's annual meeting in Jackson Hole, Wyoming, his sense of deja vu may be overwhelming.
Stocks have been giving up gains won after last year's speech, when Bernanke hinted at plans to pump more money into the financial system. Oil prices are higher and there's been little improvement in the job market. Bond yields are down, though, because the economic outlook has deteriorated. For graphics see ~ r.reuters.com/kek33s
It's almost as if QE2, the Fed's $600 billion bond-buying program first mentioned at last year's meeting and designed to boost the struggling economy, never happened.
That's not to say investors doubt the central bank's resolve to act again if the U.S. economy keeps losing steam. Last week, it surprised markets with an unprecedented pledge to hold interest rates near zero until at least 2013.
But given questions about the efficacy of monetary stimulus to date and a growing political backlash against the Fed's policies, investors expect the U.S. central bank to keep its powder dry at this year's Jackson Hole symposium from August 25-27.
"The Fed already shocked the world when it indicated its ultra-low interest rate policy would remain in place until 2013," said Fred Dickson, strategist at D.A. Davidson & Co in Lake Oswego, Oregon. "That telegraphed the economy is going to stay weak. But monetary and fiscal policies haven't worked very well, so I don't expect we'll get a QE3 announcement. That would really catch everybody by surprise."
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It's not that the central bank doesn't have a few tricks left up its sleeve. Bernanke has previously detailed what he could do next. This includes buying long-dated Treasuries to push down long-term rates and cutting interest on bank deposits held at the Fed to encourage more lending.
For graphics see ~ r.reuters.com/kek33s
Still, there's the problem of ever diminishing returns. The benchmark S&P 500 index rallied more than 4 percent when the Fed on August 9 said it would keep rates low into 2013, but fell more than 4 percent the next day. At around 1,200, the index is off its August 8 low but trading remains volatile.
Atlanta Fed President Dennis Lockhart has said the central bank could buy more long-term bonds to lengthen the duration of its portfolio, which would flatten the yield curve and allow homeowners to refinance at lower interest rates.
But with rates already low, the impact may be muted.
What's more, investors said lower 30-year bond yields could actually complicate life for insurance companies that have to match liabilities and assets.
Political Backlash
Then there's the limited impact the Fed's quantitative easing, or QE, has had on the broader economy, which ground to a halt in the second quarter and, some fear, is flirting with a slide back into recession.
read full article @ http://www.reuters.com/article/2011/08/17/us-markets-fed-jackson-hole-idUSTRE77G62V20110817
