Will Ben Bernanke announce QE3 at Jackson Hole

The market is eagerly awaiting the meeting at Jackson Hole on Friday, where Central Bankers retreat for an economics conference and discuss ways to maintain the global economic recovery.

All eyes will immediately focus on one man however, the Chairman of the Federal Reserve, Ben Bernanke. The market is awash with speculation and hope (as opposed to optimism) that Bernanke may announce or give an indication towards an impending form of quantitative easing to help stimulate the US economy and avoid it slipping back into recession. Interestingly enough it was at this same point last year when Bernanke used the summit at Jackson Hole to first give the market indications that a second round of quantitative easing could be forthcoming should growth outlook slip further and so naturally there is a sense of déjà vu here.

So what, if anything, could be announced?
At the very least there is likely to be an offering of greater transparency and explanation over their recent downgrade the US economic climate made early this month.

It has been quickly assumed by many investors and the media that Ben Bernanke announced QE2 at Jackson Hole last year. He didn’t. What he did however do was alleviate concerns that the Fed was unwilling to act should growth deteriorate further, going so far as to announce what options were on the table should this happen. It is conceivable that he may make somewhat of a similar statement this time around.

The options announced last year were; lowering the amount of interest paid on excess reserves, modifying the Committee’s communication and/or start more asset purchases of longer term securities i.e. QE3. Certainly the latter option is likely to be very well received in the market in the near term on hopes that the extra liquidity could help to swell asset prices in much of the similar fashion that it did for the first and second phases of QE. It would be no surprise if Bernanke announced similar options this time around and in that sense, most likely dusting down his old speech from last year.

That said, the mere fact that the market is awash with anticipation towards what may be announced by Ben Bernanke, at a time of intense trader and investor sensitivity after a dreadful month’s stock market performance, is putting Bernanke in a difficult situation. The Fed Chairman is unlikely to ignore this speculation and may indeed be forced into giving the market more clues as to the steps they will take to strengthen growth than he would otherwise have liked to have given had it not have been for the recent bearish stock price moves. This may include announcing which of the aformentioned options is favoured and maybe even giving some form of timeframe. Though of course this is just mere speculation.

Certainly with it being a Friday and with the bank holiday weekend to come, what the markets see from Jackson Hole on Friday could kick start some more volatility for the financial markets over the ensuing trading days.