Bernanke speech seen tipping to Fed’s next move

By Mark Felsenthal

WASHINGTON (BestGrowthStock) – U.S. Federal Reserve Chairman Ben Bernanke could provide clues on the Fed’s next policy steps in a speech on Friday exploring central bank options when inflation is low.

Financial markets, which widely expect the U.S. central bank to begin a new program of buying longer-term U.S. Treasury securities at its November 2-3 meeting, will hang on Bernanke’s words for clues about the scope of the program.

Observers will also look for more details about Fed plans to raise markets’ expectations of future inflation, a subject policy makers broached at their last meeting in September.

Raising inflation expectations could boost the economy by spurring businesses and consumers to make purchases before prices rise. It could also encourage borrowing, since inflation erodes the value of loans.

Bernanke is due to talk at 8:15 a.m. ET at a Fed conference in Boston.

Since the U.S. recovery began showing signs of fading over the summer, the Fed has steadily built up expectations that it would renew its large-scale asset buying to support growth. Most economists expect around $500 billion in easing before the end of the year, a Reuters poll showed.

“It’s more or less clear that they will pull the trigger,” said Yelena Shulyatyeva, an economist for BNP Paribas in New York. “It depends on the specifics — how much it will be, what the initial installment will be.”

The Fed’s move toward further easing has pushed the dollar down to its lowest level this year against a broad basket of currencies, drawing the ire of emerging economies contending with a flood of capital as investors chase higher yields. Many countries, worried about the impact on their exports, have taken steps to temper the rise in their currencies, sparking fears of a series of competing devaluations.

RECESSION OVER BUT UNEMPLOYMENT LINGERS

Even though the deep U.S. recession ended in June 2009, unemployment still hovers at a lofty 9.6 percent, and core inflation, as measured by the Fed’s favorite gauge, has slipped to 1.4 percent. Fed officials shoot to keep inflation in a range of 1.7 percent to 2 percent.

When Fed officials convened on September 21, many felt progress was unsatisfactory on both the jobs and inflation fronts. Several officials felt a further easing of policy would be needed soon absent a sudden improvement in the economy.

Financial markets will look to Bernanke to provide clarity on whether the Fed is likely to announce a big program of asset purchases to be carried out over several months or whether it will opt for more modest buying plans made public one meeting at a time. Some Fed officials believe the impact of asset buying in lowering borrowing costs is greatest when markets know the full extent of the Fed’s purchase plans.

“It seems to me that they would err on the side of a shock-and-awe-type approach at this point to really try to jump-start the economy,” said Jay Bryson, an economist for Wells Fargo Securities.

Another unknown is what new communications strategy the Fed could use to complement any asset buying and battle the risk a troubling deflation could take hold.

Minutes of the Fed’s September 21 meeting released on Tuesday showed officials debated setting an explicit target for inflation, or even announcing they will allow inflation to temporarily run above targeted levels for a time to make up for lost ground if inflation fell short of their objective.

The Fed traditionally seeks to prevent inflation at all costs. But with month upon month of sluggish growth and high unemployment, some officials worry prices could enter a damaging downward spiral.

Bernanke speech seen tipping to Fed’s next move