Bernanke, Trichet Economic Paths May Diverge at Jackson Hole
Federal Reserve Chairman Ben S. Bernanke and European Central Bank President Jean-Claude Trichet, who united to fight the worst global recession in six decades, may be diverging over the outlook for their economies.
The Bernanke-led Fed, while saying U.S. growth would be slower than anticipated, announced on Aug. 10 it will buy Treasuries to set a $2.05 trillion floor on its balance sheet and keep interest rates from rising. Trichet said Aug. 5 that the euro-area economy was surpassing forecasts, which may pave the way for the ECB to look at phasing out its emergency lending measures.
Any transatlantic divide may be on display when the two central bankers address the Fed’s annual symposium in Jackson Hole, Wyoming. Their attitudes contrast with the second quarter, when the European fiscal crisis forced Trichet to buy government bonds for the first time and Bernanke discussed how and when to cut the Fed’s balance sheet.
Now the ECB is “actually looking to the timing of an exit policy, whereas the Fed has obviously put that on the back burner,” Mickey Levy, chief economist at Bank of America Corp. and a Jackson Hole regular, said in a Bloomberg Radio interview with Tom Keene. “The U.S. economy right now is in a soft patch and feels fragile, while in the aggregate the European economies have seemingly weathered the storm much better than people expected.”
Trichet’s optimism and Bernanke’s caution could strengthen the euro against the dollar, said Julian Callow, chief European economist at Barclays Capital in London. The dollar slid 0.5 percent yesterday in New York to $1.2719 per euro.
“The ECB instinctively wants to anticipate a normalization of inflation, whereas the Fed would rather see inflation entrenched before normalizing policy,” said Callow, a former Bank of England economist. “The ECB seems to be viewing the world more optimistically and the Fed more pessimistically.”
The Kansas City Fed brings monetary policy makers and economists from more than 40 nations to the Jackson Lake Lodge for debates and hikes in the shadow of the Teton mountains. Bernanke will have his first public chance to defend the Aug. 10 decision and discuss his outlook when he speaks at 10 a.m. New York time. After a morning of presentations and discussions on economic issues, Trichet follows with a speech over lunch at 2:50 p.m.
Bernanke is likely to elaborate on how much Fed officials or staff economists have reduced their forecast for 2011 growth and provide “some degree of clarity” on possible plans for injecting more monetary stimulus, Paul McCulley, managing director at Pacific Investment Management Co., said in a Bloomberg Radio interview.
“The equity market may make a very loud noise in the negative direction” if Bernanke fails to deliver a clear message, McCulley said.
The disparity between Bernanke and Trichet has “shades of 2008,” Callow said, referring to the ECB’s decision of July that year to break with other central banks and raise interest rates while the Fed judged financial markets “remain under considerable stress.” In October 2008, Bernanke, Trichet and other central bankers engineered history’s broadest coordinated interest-rate cut.
The difference probably reflects the Fed’s mandate to achieve “maximum employment” and low inflation compared to the ECB’s primary focus on price stability, said Steven Bell, chief economist at London-based hedge fund GLC Ltd. and a former U.K. Treasury official.
U.S. indicators are increasingly pointing to slower growth. Gains in private payrolls fell to an average 51,000 monthly pace in May through July from 119,000 in the first four months of 2010, while the jobless rate held at 9.5 percent last month.
JPMorgan Chase & Co. last week reduced its forecast for growth this quarter to an annual rate of 1.5 percent from 2.5 percent and lowered its estimate for the last three months of 2010 to 2 percent from 3 percent.
“The Fed has an employment issue, and Trichet does not,” said Diane Swonk, chief economist at Chicago-based Mesirow Financial Inc., who will be at the Jackson Hole conference. She said she’s looking for Bernanke, in his speech, to show “maybe not his hand but certainly to show he feels he still has an arsenal and to lay that arsenal out.”
If weakness in the U.S. economy persists in the coming weeks, “I don’t think they’ll have much choice” but to restart large-scale purchases of assets including mortgage-backed securities, said Swonk, whose firm oversees more than $40 billion.
Across the Atlantic, the euro-area is rebounding from its darkest hour when the escalation of the Greek-led fiscal crisis forced the ECB to halt its withdrawal of support for the region’s banks and reintroduce some support measures, such as unlimited three-month loans. Germany powered the 16-nation bloc to its fastest economic growth since 2006 in the second quarter, and inflation accelerated to the fastest pace in 20 months in July on rising energy prices.
Still, any differences between Bernanke and Trichet may be a matter of tone. ECB council member Axel Weber, who will be in Jackson Hole, said in an Aug. 19 interview with Bloomberg Television that the ECB should wait until the first quarter of next year before determining when to withdraw emergency lending measures.
Weber’s comments suggest the ECB’s tightening of unlimited bank lending programs will be “a little slower than looked likely previously,” said Klaus Baader, co-chief European economist at Societe Generale SA in London.
Ken Wattret, chief euro area economist at BNP Paribas SA, says Europe is not immune to events in the U.S. and that regardless of what Trichet says now he may have to follow Bernanke if the Fed buys more Treasuries than currently planned. Such purchases would weaken the dollar against the euro, threatening Europe’s export-led recovery, he said.
“If the U.S. economy is sufficiently weak to be giving Bernanke some anxiety, then that will have spillover effects on the ECB,” Wattret said. For now in Jackson Hole, “the thrust from Bernanke will be on what the Fed could still do, while the message from Trichet is that we have done all these measures and they appear to be working.”