Measures showing U.S. financial market conditions have improved put little pressure on Federal Reserve Chairman Ben S. Bernanke to signal added monetary stimulus this week, according to Credit Suisse Group AG.
The CHART OF THE DAY shows the Bloomberg U.S. Financial Conditions Index moved above zero on July 27, a threshold that signals receding market risk. It was below negative 1 last year when Bernanke spoke at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming. The bottom panel shows the spread between the rate to exchange floating for fixed-interest payments and Treasury yields for two years, a gauge of investors’ perceived risk in the banking sector, fell yesterday to the lowest since May 2011. Bernanke speaks at this year’s Jackson Hole conference on Aug. 31.
“Most Fed officials would acknowledge that quantitative easing is most effective in addressing financial turmoil and it’s harder to prove its real fundamental, economic effects,” Dana Saporta, U.S. economist in New York at Credit Suisse, said in an interview yesterday, referring to the central bank’s debt-purchasing strategy. “The financial markets are calmer now than they were in early August. Our thinking, and perhaps that of the chairman, as well, is that while easing is highly likely from the Fed in the months ahead, the timing is uncertain.”
The so-called swap spread narrowed to a one-year low of 16.3 basis points yesterday as investors speculate policy makers will contain Europe’s debt crisis and that America’s economy will endure headwinds from the region’s troubles. Sentiment toward the euro area has improved since European Central Bank President Mario Draghi vowed on July 26 to do “whatever it takes” to save the common currency and signaled that would include buying sovereign debt.
Bernanke may structure his Jackson Hole speech this year as he did in 2010, discussing the economic outlook, policy actions to date, and costs and benefits of future policy alternatives, Saporta and Neal Soss, chief U.S. economist at Credit Suisse, wrote in a note published on Aug. 26. Credit Suisse gives a 50 percent chance the Fed will ease monetary policy at their policy meeting, Sept. 12-13.