Hole lotta trouble if Ben doesn't deliver

Global Equities markets have been more bouyant over the past trading sessions as attention switches to Fed Chairman Ben Bernanke and other Central Bankers' annual get together at Jackson Hole in Wyoming. The reason that this conference is so important is that last year set a precedent, in that QE2 - round two of the Fed's Quantitative Easing programme - was announced, and markets are clinging to the hope that more stimulus will be signalled this year.

In simple terms, Quantitative Easing (or QE for short) is a monetary policy tool which is used when all usual stimulus measures, such as lowering of interest rates, have been exhausted. It involves the printing of money which is then used to purchase assets (in the case of the US QE programme, US Treasury Bonds). The effect is to reduce the yield on these Bonds, and as these are often held by banks, to increase banks' liquidity to lend to business and consumers. The first wave of QE was introduced shortly after the Lehman Brothers collapse in 2008 and the second round was put into action last year.

A major talking point is whether QE3 is necessary or even welcome. The previous rounds of QE1 and QE2 lowered the yield on Treasury Bonds, so much so that the yield on the 10 year note briefly touched 2% last week.  In other words, lend the US Government your money for 10 years and they will pay you 2% per annum until 2021. Banks certainly do not need more liquidity at this time - they are simply hoarding it as households and businesses are in a mood to deleverage and pay back existing debts rather than take on new loans. It also failed to stimulate any response in the limp US housing market. QE also introduces inflation, which continues to sit above the Fed's target, and reduces the spending power of household income.

That said, Bernanke will not want to disappoint a febrile market and investors expect that  "Helicopter Ben" (as Bernanke has been a little unfairly labelled) to come to the rescue once again and give markets another shot of adrenaline. The absence of any meaningful announcement at Jackson Hole will be seen as a failure, and may send markets lower once again. Any respite in the markets may be short-lived as QE at this time would, in my opinion, be ineffective at bolstering economic growth or creating jobs, which the US needs to build a firm foundation for recovery.