Split brews before Jackson Hole talks

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 US growth would be slower than expected, said on August 10 it will buy Treasuries to set a US$2.05 trillion ($2.9 trillion) floor on its balance sheet and keep interest rates from rising.

Trichet said on August 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 appear when the two 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", said Mickey Levy, chief economist at Bank of America.

"The US economy 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 per cent yesterday in New York to US$1.2719 a euro.

"The ECB instinctively wants to anticipate a normalisation of inflation, whereas the Fed would rather see inflation entrenched before normalising policy," said Callow.

"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 lodge for debates.

Bernanke will have his first public chance to defend the August 10 decision and discuss his outlook when he speaks tomorrow. 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, said Paul McCulley, managing director at Pacific Investment Management.

"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 that financial markets "remain under considerable stress".

In October 2008 Bernanke, Trichet and other central bankers engineered history's broadest co-ordinated 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.

US 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 this year, while the jobless rate held at 9.5 per cent last month.

JPMorgan Chase last week reduced its forecast for growth this quarter to an annual rate of 1.5 per cent from 2.5 per cent and lowered its estimate for the last three months of this year to 2 per cent from 3 per cent.

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 on August 19 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 programmes will be "a little slower than looked likely previously", said Klaus Baader, co-chief European economist at Societe Generale in London.

Talking and walking
* The Kansas City Fed brings monetary policy makers and economists from more than 40 nations to the Jackson Lake Lodge.
* These movers and shakers debate the world economy and take hikes in the shadow of the Teton mountains.

- BLOOMBERG