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Ben Bernanke Under Pressure To Prop Up Us Economic Recovery

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• Bernanke faces toughest time yet after week of bad news

• Federal Reserve chairman's speech will be scrutinised by markets

• Committee split over 'QE-lite' solution to double-dip fears

When Ben Bernanke addresses the annual symposium of central bankers in Jackson Hole tomorrow he does so against arguably the most challenging backdrop in his tenure as Federal Reserve chairman.

At the end of a week of gloomy reports, Bernanke faces mounting expectations from markets that the Fed will step in to prop up the US's faltering economic recovery. News of stalling business activity and dismal home sales have fanned talk of a double-dip recession at a time when all the easy options have run out. At the same time, divisions appear to be emerging among his committee of policymakers.

Bernanke's speech at the Wyoming symposium, entitled The Economic Outlook and the Federal Reserve's Policy Response, will be scoured for any signs that he will live up to his nickname of "helicopter Ben" and scatter more money over the faltering US economy.

Following a slew of downbeat economic indicators, market expectations are growing that there will be more quantitative easing from the Fed before the end of the year. Under the radical scheme, also used in the UK last year, central banks pour money into buying assets such as government bonds from banks and the commercial sector, pumping more cash into the financial system and at the same time cutting market rates.

The Fed's latest policy meeting was reportedly the most contentious in Bernanke's four-and-a-half-year term there, but resulted in a decision to carry out what has been described "QE-lite". It decided to reinvest the proceeds of its maturing holdings of mortgage-backed securities by putting the funds into Treasury bonds.

Many economists say the next move will be more full-blown QE. But not everyone agrees it is the best way to prop up a fragile recovery. With the US growth outlook already "alarmingly bad", bond yields had fallen sharply, noted Rob Carnell at ING Financial Markets. If part of the aim of QE was to lower market rates, what was the point of embarking on it when they were already falling on their own?

"The market's fixation with QE is misguided," said Carnell. "Buying more bonds when fixed-income markets are already rallying strongly is a bit of a waste of time, and about the only 'good' argument for doing so would be that it might help to prevent a rout in equity markets. They will, at least temporarily rally on action of this kind.

"The problem is that the key word here is 'temporarily'. A policy that will not provide anything more than a shot in the arm for market confidence will sooner or later be swamped by the tide of bad news still flowing."

Others are sceptical that Bernanke will feel he is in a position to drop any hints on more QE given the recent report in the Wall Street Journal that seven out of 17 officials disagreed with or expressed reservations about "QE-lite".

"Under those circumstances, we don't expect Bernanke to signal that the Fed would be willing to take steps to expand its balance sheet, simply because he can't be sure his colleagues would support such moves," said Paul Ashworth at Capital Economics.

Still, Bernanke's speech comes against a particularly gloomy backdrop. Markets have been repeatedly caught off guard this week as economic data has undershot analysts' forecasts. Sales of new US homes hit a record low in July, existing home sales slumped twice as fast as expected last month to a 15-year low and orders for durable goods from manufacturers barely rose.

There was one small bright spot as US unemployment claims came in lower than expected. But the next economic news due out of the US is unlikely to follow suit. GDP data tomorrow is expected to show the economy grew at an annual pace of 1.4% in the second quarter, down sharply from a previous estimate of 2.4% growth.

"Although a double-dip recession is far from certain, US data from July and August would suggest that the economic situation in the States is going to worsen before it improves," said Chris Redfern, senior dealer at currency business Moneycorp.

"It is almost certain that the [GDP] data will be revised down, probably from 2.4% to 1.4%, although given this week's disastrous housing data, it is possible that the data will be even worse than anticipated."

Damn all the easy options have run out!!! I thought the easy option was to allow the economy to reset itself, short term pain for a more sustainable economy, instead we've gone for keeping the ponzi economy going with ever more increasing ponzi scams.

Can't wait to see what Bernanke says later.

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It reads like a particularly unpromising joke. Charlie Bean, deputy governor of the Bank of England, Ben Bernanke, chairman of the US Federal Reserve, and Jean-Claude Trichet, president of the European Central Bank, are walking in the magnificent mountains of Wyoming.

They're at the annual get-together of global central bankers and external economists this weekend, held at the Kansas Fed's retreat, which happens to be in Jackson Hole, Wyoming, a beautiful spot for hiking (their tubby little bodies, that is, not necessarily interest rates).

Admiring the view, the three lords of finance stop for a moment to catch their breath. Ben asks Charlie how the UK recovery's going. "Choppy," he replies. He then turns to Jean-Claude, and asks him the same. "Very bumpy," says the Frenchman. Ben then thinks for moment and declares: "I just wish I could be as precise as you guys."

OK, I did warn you that it wasn't very funny. Central bank-based humour is unlikely to supplant sex or booze as a comedic resource, but you take my point, I hope.

Of all the world's major economies, the US is the one where the most acute dilemmas are being felt, if only because it is pretty much the only one where the full range of policy options are being kicked around in a lively public debate.

While the British and Europeans know what they want to do (even if they happen to be wrong), the Americans are still in a state of some flux. For now, at any rate, the British and Europeans have turned their backs on further fiscal action to sustain their choppy, bumpy recoveries and, if needs be, will rely on monetary policy to do the heavy lifting if a double dip hoves onto the horizon. In the US, thinking is more flexible.

It needs to be. Only a few months ago the US seemed to be fulfilling its usual role of economic locomotive, dragging the rest of the world out of the worst slump in three-quarters of a century.

Taking maximum advantage of the US Treasury's advantage of a seemingly infinite appetite for its paper, the Americans borrowed and spent their way out of trouble, complemented by an unprecedented monetary stimulus from the Fed.

Lately, however, the news has not been so good, and there is an unmistakable link between the withdrawal of specific federal subsidies and unwelcome economic developments. Nowhere is this clearer than in the world of real estate, where the last few days have seen some shocking numbers on sales of new and existing homes (the Americans still build sufficient new property for it to command its own index). Indeed the July figure for new home sales was an all-time low, and down about a third on last year.

The reason is that the $8,000 tax break available for first-time buyers expired at the end of June, with predictable consequences. Much the same goes for the aftermath of the end of the cash-for-clunkers scheme and the lay-off of temporary staff hired for the US Census. And it also goes, more generally, for the gradual fading of the government's $814bn stimulus plan.

The message is that the American economy is unable to flourish without the life-support offered by fiscal action. A realisation of that was behind Congress' decision, after a Republican filibuster, to extend the federal subsidy for unemployment pay of 99 weeks' cover.

"Are we going to engage in fiscal child abuse and borrow the money, principally from the Chinese, to pay for this? Or are we not? That's the question," asked Representative Jeb Hensarling, a Texas Republican at the end of the debate last month. A startling sort of remark, but it is the question.

Not that the Republicans want an end to the tax concession for the wealthy enacted by George W Bush that will expire at the end of this year. So, yes, the debate is confusing and hypocritical, as well as lively.

So should Americans postpone the inevitable contraction again? And if so, who should take action – the White House, the Fed, or both?

Nouriel Roubini, sage of our times, apparently thinks some sort of concerted action is needed, for fear of something much worse. He predicts that the respectable 2.5 per cent annualised rate of growth for the US in the second quarter will be downgraded to around half that by the official statisticians later today. Growth in the third quarter, he believes, will slow to "well below" 1 per cent in the third quarter. He puts the odds of a renewed recession at 40 per cent, which will give them something to talk about at Jackson Hole. Mr Roubini says Americans face a revival that will be "anaemic, sub-par, below-trend for many years given the need and process of deleveraging.

"With growth at a stall speed of 1 per cent or below, the stock markets could sharply correct, and credit spreads and interbank spreads widen while global risk aversion sharply increases. Thus a negative feedback loop between the real economy and the risky asset prices can easily then tip the economy into a formal double dip." A classic debt-deflation cycle, then.

Whether the Obama administration will pursue some further stimulus – and Treasury Secretary Tim Geithner and adviser Larry Summers appear keen on more support for small business and the extension of Bush's tax cuts for the middle classes only – the Fed will probably be the main immediate force fighting any renewed downturn.

Even by the usually intense standards of Fed-watching, Mr Bernanke's speech today will be weighed, parsed and dissected minutely. In modestly extending its "quantitative easing" programme – directly injecting money into the economy – a few weeks ago, the Fed has signalled in actions as well as words that it stands ready to rescue the US economy. But within the Fed there is also a lively debate.

Like the Bank of England's Andrew Sentance, the Fed has its own lone hawk, Thomas Hoenig, arguing for a tightening of monetary policy. Mr Hoenig just happens to be the head of the Kansas City Fed, and thus the host at Jackson Hole. No one will want to be rude to the hand that feeds them but it appears likely that Mr Hoenig will be in a minority of one once again.

Excellent global recovery down to deficit spending so we need more of it.

Looks like Roubini is wearing his populist hat again.

Still I'm sure our central bankers know what they are doing as they are "economic experts" of the highest order who's forecasting ranks slightly below that of a cab driver.

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  • 439 Brexit, House prices and Summer 2020

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