Great expectations from Bernanke

London: Jackson Hole is to central bankers what Cannes is to filmmakers.

Each year, the Federal Reserve bank of Kansas City invites policymakers to the Grand Tetons in Wyoming for a thinkathon, where they expect to be wowed by something new. It doesn't have to be a big budget production: central bankers can get just as excited by an elegant paper on the shortcomings of the Basel 2 capital adequacy arrangements as they can about a policy initiative from Sir Mervyn King.

Financial markets take a different view, this year in particular. They are not interested in low-fi musings on the merits of inflation targeting; they want the chairman of the Federal Reserve, Ben Bernanke, to do the full George Lucas bit and produce a real blockbuster of a speech that will rally share prices and prevent the world economy from sliding back into recession.

Last year, Bernanke turned up at Jackson Hole with a clear message: the US was preparing to turn on the money taps for a second time, something it finally did in November with the announcement of a $600 billion package spread over eight months.

The Fed chairman's message to his fellow central bankers was the signal for the markets to take off, and share prices on Wall Street rallied by 8 per cent over the next three months.

If Bernanke did it in 2010, goes the thinking, he is sure to do it again in 2011, especially with the markets in a state of upheaval. On Friday, the hope in the City and on Wall Street was that we were about to have the first screening of QE3: the central bank fights back.

Just because Bernanke turned up at Jackson Hole last year to announce QE2 the second round of quantitative easing does not mean he is going to repeat the performance this week.

There are a number of reasons why this is the case. Last year, the Fed had already endorsed Bernanke's Jackson Hole remarks about QE. This year it is clear that no such prior approval has been given, or sought.

Political compulsions

With a presidential election little more than a year away, the Fed knows that the debate about QE has become highly politically charged. Sceptics do not see it as the light sabre with which Bernanke fends off a second Great Depression. For them, QE is throwing good money after bad: less Star Wars than The Money Pit 3. Bernanke justified QE2 not by the need to boost US growth but as necessary to prevent the world's biggest economy from slipping towards deflation.

On the other side of the ledger, the experience of the past two and a half years suggests that QE has costs as well as benefits.

The Fed will wait before embarking on a further bout of QE. Action now would look like a panic response to the events of the past month, engendering the suspicion that the Fed has been forced into emergency action because it knows something that nobody else does.

What's more, one of the few bright spots amid the market turmoil has been the drop in the price of oil.

Cheaper fuel prices should start to feed through into lower inflation over the coming months, boosting real incomes and hence providing a bulwark against a double-dip recession. This would be put into jeopardy were QE3 to unleash a fresh wave of speculation in the commodity markets.

It would be a good idea for central banks to keep a few shots in what is starting to look like an awfully empty locker. The case for QE3 will look stronger in six months' time if the economy remains weak and inflation is coming down.

If QE is deemed to be necessary, some recalibration is called for. Thus far, it has operated as a welfare system for finance. The benefits have been enjoyed on Wall Street; the tab has been picked up on Main Street.