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Expectations for Jackson Hole are far too high. As the global economy slides back towards another recession, financial markets are looking for the world’s two leading central bankers to give them a steer when they address this annual symposium in the wilds of Wyoming on Friday.
But the markets may well be looking to Fed Chairman Ben Bernanke and European Central Bank President Jean-Claude Trichet for answers that only politicians can provide.
The problem is that with leaders in both the U.S. and the euro zone hamstrung by local politics and unable to make bold decisions to save their economies, central bankers are having to step into the breach.
In the U.S., as major banks slash their growth forecasts for the U.S. economy this year to nearly zero, Mr. Bernanke is being left to clear up the mess left by President Barack Obama’s inability to get congressional approval for a sustainable debt package.
Despite the loss of U.S.’s triple-A credit rating, it is now up to Mr. Bernanke to convince the international investment community not to walk away.
But there isn’t much he can do.
While his president is on holiday in Martha’s Vineyard, Mr. Bernanke will be left with the task of reassuring markets that the Fed is prepared to ease monetary policy further if needed.
The problem for Mr. Bernanke is how to do this.
He can hardly make the same mistake he made last year, when he announced a second round of quantitative easing that has failed to work.
Announcing a third round this year would hardly boost his or the Fed’s credibility. The problem is that the obvious alternatives, such as lengthening the maturity of its current security holdings, could prove just as disappointing.
At least Mr. Bernanke won’t be alone in what could be a futile quest to turn market sentiment around at Jackson Hole.
Mr. Trichet has also been left holding the euro-zone baby and by the time he gets up to speak in Wyoming, pressure on the ECB to take even more action to save the single currency could have increased.
The past week has brought evidence that the economic slowdown that was once limited to peripheral euro-zone members has now infected the economies of the core countries.
At the same time, despite the ECB’s highly unusual decision to support the bond markets of Spain and Italy, the cost of peripheral debt has remained fairly high.
Over the weekend, a rush to rescue Greece’s failing Proton Bank highlighted the continuing pressures and risks that face the region’s banking community in general.
Even more telling for the euro was an apparent shift on China’s recent staunch support. An article in the country’s official newspaper, People’s Daily, complained about the impact the euro debt crisis will have on China’s real economy and hardly sounded like a vote of confidence.
Given the importance of Chinese support for the euro, Mr. Trichet will be under more pressure to step up to the plate.
Euro-zone leaders have made little progress towards the fiscal convergence that will be vital for the euro’s survival with German Chancellor Angela Merkel repeating this weekend that plans for issuing euro zone bonds were “not the right answer.”
So Mr. Trichet too will be left with the task of reassuring markets that the central bank will continue to intervene as well as possibly reverse the rate increase it announced last month, in an effort to quell more investor dissatisfaction over how euro-zone politicians are dealing with the crisis.
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It really is time for changes that are not under the purview of central banks — cooperation by members of Congress on important issues such as energy, education, infrastructure, tax issues, etc.. Citizens need to think along, be involved in discussions and initiatives….the Fed and ECB have gone as far as they reasonably can go under the circumstances. The heavy lifting by the rest of us has yet to be done — and procrastination is not going to lighten the load.
The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
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