Bernanke speech triggers very choppy market and trader indecision

A crucial speech by Fed Chairman Ben Bernanke at Jackson Hole this afternoon, where no definitive announcement of a third phase of quantitative easing was mentioned, trigger a very volatile end to trading for the week, with stock priced bouncing like a yo yo into the close, whilst traders were left somewhat disappointed.

The speech had been the headline for the entire week, with stocks gaining at the start of the week on hopes that Bernanke may announce QE3, only for prices to fall in early bouts of profit taking on Thursday and Friday morning as investors protected themselves against a disappointment.

The reaction in the markets to Bernanke’s speech was quick and volatile. The FTSE 100 lost around 1% in the immediate minutes proceeding the speech on disappointment of no QE, only to see bargain hunters make their move to pick up stocks from their lows and this helped to FTSE to fully retrace these losses to trade higher by some 2% or 100 points towards the close to cap a seesaw day of trading.

Bernanke between a rock and a hard place
Ben Bernanke in truth is stuck between a rock and a hard place. One the hand he has the financial markets crying out for more quantitative easing to help inflate asset prices further and pump liquidity into the markets, whilst on the other hand he has dissent in his own FOMCcamp and political opposition to further easing. The result today was therefore of no real surprise; no QE3 announced but merely a showing of continued support should growth continue to deteriorate and reminded the market that the tools to support had not changed from August’s FOMC meeting. Bernanke said: ‘The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.’

In an interesting move, Bernanke did move to extend Septembers one day FOMC meeting to two days to allow for ‘a fuller discussion’. One cannot help but read into this move as one designed to help ‘realign’ and ‘unify’ the divisions shown in the Committee by the three dissenters to the last meeting.

Interestingly also, Bernanke did announce that he was more optimistic in his view of the longer term prospects for the US economy, which depending on one’s viewpoint either shows confidence or open himself up to credibility questions.

At the very least, the weight of expectations from today’s speech may not have dissipated from the actual speech itself. It may indeed have simply transferred immediately over to the next FOMC meeting in September, where the market will now hope that the two day meeting may realise more definitive actions by the Fed.