Federal Reserve Chairman Ben Bernanke's speech Friday morning in Jackson Hole, Wyo., is morphing into a modern-day E.F. Hutton-like moment on Wall Street.
"Investors will be acting like extras in an old E.F. Hutton commercial, straining to hear what was said," says Sam Stovall, chief equity strategist at S&P Capital IQ. (The ad's slogan: "When E.F. Hutton talks, people listen.")
Bernanke is expected to talk about what the Fed can -- and might -- do next to help the economy and what might prompt it to act. Investors will listen for clues to help decipher if, and when, Bernanke would inject a new round of stimulus.
The stakes are high. A big driver of the stock market's 10% summer rally has been hopes the Fed would ride to the rescue again with a third round of quantitative easing (QE). What Bernanke says and how investors decode his words may determine the short-term direction of stocks.
Since the financial crisis, investors have become addicted to the liquidity the Fed has funneled into markets via its bond-buying programs, designed to bring down interest rates and borrowing costs. Stocks have rallied sharply after each of the three major interventions, dubbed QE1, QE2 and Operation Twist, although the rallies have gotten smaller with each program.
There is a risk that markets will be "disappointed" if Bernanke does not announce or strongly hint that a new stimulus program is on its way at Jackson Hole or when the Fed meets in mid-September, says Bruce Bittles, chief investment strategist at R.W. Baird. "The Jackson Hole speech is the focus of attention," he says.
Wall Street is not expecting Bernanke to commit to QE3 on Friday. The Fed has said repeatedly that it will take action if needed but that its future moves are highly dependent on incoming economic data.
As recent data, from retail sales to home sales and prices, have been upbeat, many analysts believe the Fed will defer any QE3 decisions until after the August employment report on Sept. 7. If job creation is weak, the Fed will have more latitude to go forward with QE3.
The consensus is that the Fed will announce QE3 no earlier than its upcoming Sept. 12-13 meeting.
While Bernanke isn't likely to provide specifics Friday, he is expected to say why more stimulus is warranted, and what tools the Fed has and how effective they will be, notes David Kelly, chief global strategist at J.P. Morgan Funds.
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