By Steven K. Beckner

JACKSON HOLE, Wyoming (MNI) – As central bankers from around the
world gather in the shadows of the Grand Tetons for the Kansas City
Federal Reserve Bank’s annual symposium, Fed watchers are eagerly
awaiting Fed Chair Ben Bernanke’s keynote address Friday morning.

Many financial market observers are hoping Bernanke will signal
another injection of monetary stimulus — perhaps a third round of
large-scale asset purchases or “quantitative easing” to further reduce
long-term interest rates. Wall Street will be disappointed if he does
not give such a signal.

But while Bernanke said in an Aug. 22 letter to House Oversight
Committee Chairman Darrell Issa that the Fed has “scope” to do more, he
could well decide to take a cautious approach less than two weeks before
policymakers meet again September 13 to revise their economic and
monetary policy projections and reassess their credit stance.

Since the July 31-Aug. 1 meeting of the policymaking Federal Open
Market Committee, most economic numbers, while not breathtakingly
strong, have been fairly upbeat, despite great uncertainty about
headwinds from Europe and from U.S. fiscal policy. And more key data
will be released before the FOMC has to decide what to do.

So, while Bernanke could well reiterate the FOMC’s preparedness to
provide more accommodation, he may not want to get too far out in front
of his colleagues Friday morning.

And he seems likely to be vague about the specifics of what tools,
if any, the FOMC is likely to use, leaving open to speculation whether
he will seek a third round of quantitative easing (QE3) or a tweaking of
the committee’s “forward guidance” on the future path of the federal
funds rate.

At the conclusion of its July 31-Aug. 1 meeting, the FOMC stayed on
hold but incorporated a stronger easing bias in its policy statement. It
said the FOMC “will closely monitor incoming information on economic and
financial developments and will provide additional accommodation as
needed to promote a stronger economic recovery and sustained improvement
in labor market conditions in a context of price stability.”

Minutes of that meeting released last week revealed that “many
members judged that additional monetary accommodation would likely be
warranted fairly soon unless incoming information pointed to a
substantial and sustainable strengthening in the pace of the economic
recovery.”

But the meeting was more than four weeks ago, and in the meantime
there have been data on jobs, consumer spending and housing which
Atlanta Federal Reserve Bank President Dennis Lockhart and others have
described as encouraging.

The Fed’s latest beige book survey did not show any appreciable
increase in economic activity, but neither did it show any deterioration
in what was variously described as a “modest” or “moderate” pace of
growth.

Whether the statistical and anecdotal information on the economy
meet the test of “substantial and sustainable” is a matter of opinion.
which is sure to differ from one official to another.

The other substantial development since Aug. 1 is the rally in the
stock market, at least until recently.

Lockhart, who last week indicated he had become less inclined to
support QE3 than he had been in July, said Thursday that it is now a
“close call” whether more accommodation will be approved, and that is
probably a pretty good description of the odds.

Notwithstanding the approach of the presidential election Nov. 6,
FOMC members seem willing to risk being seen tampering with the
political process if necessary to boost the economy.

But that is a decision that will be made on Sept. 13, only after
FOMC participants have gone through their quarterly exercise of
revising their Summary of Economic Projections, including new funds rate
forecasts.

It is still not a foregone conclusion that the Fed will act on
Sept. 13. Much will depend on the remaining two weeks of data, in
particular the August employment report.

If no move is made at the next meeting, the FOMC could decide to
act at the Oct. 23-24 meeting, if at all.

It remains to be seen whether Bernanke and his colleagues will find
it necessary to layer additional accommodation on top of the ongoing
$267 billion bond purchase scheme known as Operation Twist Two.

Nor is it certain that additional accommodation would take the form
of QE3 or an extension of the expected period of zero federal funds
rates beyond “late 2014.”

If the communication route is chosen, the minutes suggest one
possibility: “It was noted that such an extension might be particularly
effective if done in conjunction with a statement indicating that a
highly accommodative stance of monetary policy was likely to be
maintained even as the recovery progressed.”

Since European Central Bank President Mario Draghi has chosen not
to come to Jackson Hole this year, the spotlight will be even more on
Bernanke.

Those who are looking for a blunt signal that QE3 is not just
possible but probable are apt to be disappointed.

** MNI **

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