Bernanke's speech at Jackson Hole, where at the same point last year he introduced QE2, has disappointed those hoping for a further programme of monetary easing, which would boost confidence, help to safeguard the US economic recovery, and improve the US stock market.
In truth, Bernanke's failure to pull the trigger on QE3 should not come as a surprise. The US economy is certainly in dire straits; its second quarter US GDP figure (annualised) was announced this afternoon to be a disappointing 1.0%. However, we may have to see the US recession dip back into recession, or at least come closer to doing so, in order for Bernanke to introduce QE3.
One key issue is that of US inflation. When QE2 was signalled, US inflation was falling, but at present the figure is rising and further monetary easing would exacerbate this. Another issue is that of dissent within the US Federal Reserve; the central bank is more prone to decisions by consensus and it would have been unusual for Bernanke to go ahead with the collection of high-profile, dissenting, fellow US policymakers we have heard from in recent weeks.
Bernanke stated that he is focusing on ways to promote US growth and improvements in the US labour market. However, this is not the end of the issue. The Fed is quite clearly willing to implement more quantitative easing, it is just setting the bar a little higher than many in the equity markets would prefer. The Fed's meeting minutes demonstrate that they are discussing the measure seriously as an issue.
So what's happened in the currency markets? Well, the US dollar rallied initially but gains have been erased. The was no new information provided by Bernanke. Do we the dollar hanging on to this week’s gains in the longer-term? No, we remain bearish on the greenback. Not even safe-haven flows seem likely to provide long-lasting support. An outlook characterised by low growth (and possible recession), high unemployment, ultra-low interest rates (and QE3?) and possibly further debt downgrades should ensure dollar-weakness.
Richard Driver
Caxton FX Anlayst
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