QE Expectations Likely Premature

Bernanke confronting data that shows rising prices, some U.S. economic growth.

Federal Reserve Chairman Ben S. Bernanke tomorrow may disappoint stock investors betting on a commitment to step up stimulus. He has little choice, given rising consumer prices and a U.S. economy that is still growing.

Gasoline costs are 33 percent higher, consumer inflation is twice as fast and inflation expectations are above levels since Bernanke signaled more easing a year ago at the annual Fed symposium in Jackson Hole, Wyoming. While the U.S. expansion has slowed, the Chicago Fed’s index of 85 economic indicators improved in July for a third month on gains in production.

Policy makers, who said Aug. 9 they’ll use additional tools “as appropriate,” probably don’t expect a recession or rapid disinflation, making a signal of bond buying premature, said Roberto Perli, managing director at International Strategy & Investment Group in Washington. Instead, Bernanke will probably detail options for further stimulus and clarify how much the Fed’s reduction in its outlook this month stems from long-term obstacles to growth, said Keith Hembre, a former Fed researcher.

“Conditions are substantially different today” compared with last year, especially inflation, said Hembre, chief economist and investment strategist in Minneapolis at Nuveen Asset Management, which oversees about $212 billion. “First and foremost, that would be the reason I think that any sort of major asset purchase announcement is unlikely,” he said.

Shipping volume at trucking companies, a barometer of the broader economy, was up 11 percent last month from a year earlier, according to Cass Information Systems. Echo Global Logistics Inc., a Chicago-based provider of freight services, said last month it’s “very optimistic about continued growth in the second half.”

Deflation Threat

The threat of deflation has subsided, with the Labor Department’s consumer price index, minus food and energy, rising 1.8 percent for the 12 months ending July. It increased at a 0.9 percent 12-month rate in July 2010 before Bernanke’s Jackson Hole speech last year.

A measure of inflation expectations watched by the Fed is showing that traders see annual price increases of 2.77 percent starting in five years, compared with 2.22 percent a year ago.

Even with the 12 percent plunge in the Standard & Poor’s 500 Index over the past month, U.S. stocks are still up 12 percent from their level on the eve of Bernanke’s speech last year, when they had gained only 1.6 percent from Aug. 27, 2009.

“The stock market is going to be disappointed Friday morning,” Rob Dugger, managing partner at Hanover Investment Group LLC and a regular participant at the Jackson Hole conference, said in an interview on Bloomberg Radio’s “The Hays Advantage.”

‘Safely to Shore’

“It’s not going to get that kind of life-buoy thrown out over the water so that it can grab hold and swim safely to shore,” he said.

A government report today signaled that excluding a Verizon Communications Inc. labor dispute, companies are slowing the pace of firings. The number of people continuing to receive jobless benefits dropped by 80,000 in the week ended Aug. 13 to 3.64 million, the fewest since September 2008.

Bernanke’s speech, entitled “Near- and Long-Term Prospects for the U.S. Economy,” is part of an annual symposium hosted by the Kansas City Fed since 1982 beside the Teton mountains.

Academics and central bank officials are gathering to consider the theme, “Achieving Maximum Long-Run Growth.” They will hear presentations by Esther Duflo, a Massachusetts Institute of Technology professor, Dani Rodrik, a Harvard University professor, and European Central Bank President Jean- Claude Trichet, who has attended the conference during five of the past six years.

Portfolio Weight

Bernanke, 57, may stress the option of trying to reduce long-run borrowing costs by giving more weight in the Fed’s portfolio to longer-term securities, Hembre said.

“Expectations ahead of the meeting were quite high at the beginning of this week for some kind of firm policy statement, but I think that’s very unlikely,” said John Kattar, chief investment officer at Eastern Investment Advisors in Boston, which manages $1.7 billion.

The Fed chief is constrained from signaling more easing by the fact that the Fed’s Aug. 9 statement already leaned toward more stimulus and dissenting votes from three policy makers limit his ability to articulate a new strategy, Dugger said. Just before Bernanke’s speech a year ago, the Fed was in a more neutral stance and he faced only one dissenter.

“The bar is high on additional security purchases,” said James Dunigan, chief investment officer in Philadelphia for PNC Wealth Management, which oversees $109 billion. He doesn’t see a need for more quantitative easing, estimating the odds of a recession as 20 percent to 30 percent.

No More Stimulus

“Those who think we’re getting an announcement of additional stimulus from the Fed will be disappointed,” Dunigan said.

Investors are focused on the U.S. central bank because it is one of the few policy levers left in Washington. U.S. lawmakers’ agreement this month to raise the debt limit includes $917 billion in spending cuts over the next decade and calls for a joint committee to find as much as $1.5 trillion more by Nov. 23. If the panel is unable to agree on a plan or if its recommendations are rejected by Congress before year’s end, an automatic $1.2 trillion in across-the-board reductions would begin in January 2013.

“We have created a very bad precedent,” said Jim Paulsen, chief investment strategist for Wells Capital Management in Minneapolis. “The financial markets whine and policy officials jump. The Fed has become the Pavlov’s dog of the stock market, and this is a horrible precedent for policy makers.”

Fed Aims

Some data are showing little indication of deflation or a relapse into recession since the expansion resumed in mid-2009. Inflation expectations, as measured by the breakeven rate for 10-year Treasury Inflation Protected Securities, were 2.04 percentage points yesterday, up from 1.57 percent a year ago. The Fed aims for long-run inflation ranging from about 1.7 percent to 2 percent.

“I would not expect Bernanke to add anything substantial to what the FOMC already said,” said Perli, who worked in the Fed’s Division of Monetary Affairs from 2002 to 2010. “The forecast that they have has come down for sure, but probably doesn’t justify additional action,” Perli said. “They are going to wait and see how the data play out.”

Bernanke may just review in detail what’s available in the Fed’s monetary policy toolkit, said Alan Ruskin, global head of Group-of-10 foreign exchange strategy at Deutsche Bank Securities Inc. in New York.

“I don’t think he will do more than outline future policy options,” Ruskin said. “Bernanke has tended to be preemptive and shown some capacity to pull a rabbit out of the hat. There are some people who may feel he is still a magician. That is a minority.”

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