On August 26th 2011 all the markets around the world were looking forward to Ben Bernanke’s speech at Jackson Hole.
What did Mr. Bernanke say during his speech?
He promised to take further steps aimed at stimulating the country’s economic development.
The markets are disappointed because:
· The Fed Res has postponed further quantitative easing
· The Fed is ready to introduce new economic stimuli.
· It is ready to support the economic recovery.
· Nothing is clear about QE3.
· FOMC has reconsidered (downgraded) its forecast for the US economic growth
· The Fed Res is not the only authority that can influence the country’s economic situation.
According to Ben Bernanke, first of all it is necessary to reduce the unemployment rate in order to restore the USA’s economic strength. He assumes the Fed Res has a variety of tools to influence the US economy.
Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling financial assets to keep market interest rates at a specified target value. The Fed reserve has already implemented 2 rounds of QE – QE1 and QE2.
Most market participants were looking forward to QE3.
Now the US economy is too slow in its recovery and needs further stimulation. Otherwise it may face a recession followed by another major crisis. That is why some experts say that the Fed Res has no choice but to introduce QE3. The interest rate is close to zero. Obama’s administration will be of no help as the budget is limited. It should be noted that QE2 caused a rally in stock and commodity markets. All these assets were anticipating QE3. Stock indexes grew, gold made new high, crude oil showed poor reaction to Libya’s events.
What was investors’ reaction to Bernanke’s speech?
They were disappointed: the US stock indexes opened with a decline. They lost 1,1-1,7%.
By now the markets have calmed down a little – the indexes have almost recovered after the decline.
According to Evgeny Olkhovsky, an expert of , despite numerous factors in favor of QE3, the level of potential costs would be too high in comparison with the benefits from another round of QE. Probably that is why Ben Bernanke abstained from mentioning QE3.
Factors speaking against QE3
Actually, the probability of QE3 was not as high as investors wanted it to be.
These are the factors speaking against QE3:
· No fundamental reasons. First of all, such measures are used to combat deflation. Now the risks are lower than during QE1 and QE2 – the latest economic data say that the US economy is seeing some growth. The inflation pressure is growing and such measures may even strengthen it.
· Debt problems. QE3 during the times of debt problems may cause a wave of criticism from the Republicans and the USA’s major creditors. Moreover, President Obama is sure that there is no threat of another recession.
· Fed Reserve’s transparent policy. In July Ben Bernanke said that the FRS wasn’t ready to implement QE3. James Bullard , President of the Federal Reserve Bank of St Louis, said during his interview to Nikkei that the FRS would increase the purchases of T-bonds when the US economy was weaker but that was not the time.
· FOMC’s concerns about the possible consequences of QE3. Another financial injection may cause a rally in commodity markets, which in its turn may undermine the US economy. QE stimulates consumer inflation.
· Low effectiveness of QE2. The US economy gained only 0.4% in Q1 2011 and 1.3% in Q2 2011.
· QE3 cannot solve the USA’s economic problems. QE has had poor impact on the country’s economic activity. The money cannot reach the country’s real economic sectors. Companies will probably restrain their investments (they will be investing only in commodities and agriculture).
Consequences for investors:
According to the strategists of Roboforex, the consequences will be different for every market:
Oil and gold. As Bernanke hasn’t said anything about QE3, crude oil prices will get an opportunity to rise on the latest news from Libya. Gold will probably continue its rally as more investors will be looking for safe haven assets.
Stock markets. The tendency is bearish. However, it is difficult to say how deep the prices decline as now investors will be focused on the eurozone’s problems. Moreover, the current stock market decline is good for the FRS as massive risk aversion will make it easier to service the US public debt.
Forex. After Bernanke Denied QE3, the pressure on the US stock market intensified. Consequently, the US dollar will strengthened as some investors see it as another safe haven asset.
The Fed Res may also restructure its debt portfolio through buying long-term bonds and selling short-term bonds, thus lowering long-term interest rates and reducing the cost of long-term corporate, mortgage and consumer loans.
Nevertheless, there is still the possibility of QE3 through a series of gradual increases in the amount of bond purchases. The first meeting is planned for Sep 21st 22nd 2011.
Such a scenario would be better than a one-shot QE3 program. Moreover, the US economy is liquid enough to implement QE3. US companies and banks have enough cash but during the time of uncertainty the money doesn’t work.
According to the Department of Masterforex-V trading system , the USD index keeps moving in a narrow range (73,51-74,57). The mid-term trend will be determined by the direction in which the price will come out of the range.
If the top of the range is broken, we’ll see a bullish FZR H4. 74,83 will be the closest level of resistance. If the bottom is overcome, the index will continue its long-term downtrend.
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What are the near-term prospects for the US Dollar?
