Markets await Bernanke as central bankers gather

JACKSON HOLE, Wyoming (Reuters) –

Federal Reserve Chairman

Ben Bernanke tackles financial stability in a key speech on

Friday but economists doubt he will provide solid clues about

future policy action to calm the credit crunch.

Central bankers are gathering in this mountain resort for

an annual symposium as financial markets tense for more losses

from home loans, amid concern that U.S. mortgage giants Fannie

Mae and Freddie Mac will need government cash.

This time last year, Bernanke told the conference the Fed

would take steps to shield the economy from the U.S. housing

collapse, but would not bail out investors.

Since then, the Fed has slashed interest rates and lined up

billions of dollars in emergency credit to prevent markets from

seizing up over mountainous home loan losses. But conditions

remain strained.

“I think he will bend over backward not to give markets

much to go on. Just ask yourself what has happened since the

last Federal Open Market Committee meeting,” said Bob

Eisenbeis, former head of research at the Atlanta Fed.

At the Aug 5 meeting of the Fed’s interest-rate setting

committee, the FOMC policy-makers held the benchmark federal

funds rate steady at 2 percent, and stressed the risks

regarding both inflation and growth against the backdrop of an

ongoing housing contraction.

“Inflation has picked up, but some of the underlying

components of inflation have moderated, particularly oil. What

can he say?” questioned Eisenbeis, who is now chief monetary

economist for Cumberland Advisers.

However, with consumer inflation at a 17-year high last

month, Bernanke must reassure markets of his commitment to

price stability, some believe.

“He’s going to have to talk about inflation,” said Columbia

University economist Charles Calomiris. “He’s going to have let

people understand what his logic is on the trade-offs between

inflation and the risks of recession.”

Bernanke speaks at 8:00 a.m local time (1400 GMT) at the

Kansas City Federal Reserve Bank’s conference. Top officials

from the European Central Bank, Bank of Japan and other senior

policy-makers from around the world are also attending.

“He will provide an outlook and describe what we’ve been

through in the last year,” said Zach Pandl, an economist at

Lehman Brothers. “The Fed remains quite concerned about

growth…. All options are on the table.”

Minneapolis Fed Bank President Gary Stern on Wednesday

defended Fed support for Fannie Mae and Freddie Mac, whose

shares have been pounded by investors fearful that a government

bailout is inevitable in the face of rising mortgage losses.

The Fed was part of a U.S. Treasury plan to provide cash

and capital to Fannie Mae and Freddie Mac, granting them the

right to borrow money from the central bank at its discount

window for short-term liquidity.

At the same time, Congress recently gave Treasury temporary

emergency powers to shore up capital at the two companies, and

Bernanke may remind markets that government tools to prop the

companies up are now chiefly in the hands of Treasury Secretary

Henry Paulson.

“I hope we get more clarity from (Bernanke) about the

coordination between monetary and fiscal policy,” said Paul

McCulley, managing director bond fund giant Pacific Investment

Management Co (PIMCO).

“The Fed’s done yeoman’s work, but there are limits to what

the Fed can deliver,” McCulley said.

(Additional reporting by Mark Felsenthal; Editing by Chizu

Nomiyama)