Editor’s Note – Get a new wheelbarrow, you are going to need it to buy a loaf of bread with all that worthless cash you have floating around. What, you have no cash? You cannot afford to have your few dollars and the value of your home go down again? Well, if this speech Bernanke gave in Jackson Hole, Wyoming at the annual Fed gathering is any indicator – here comes QE3.
Its not set to happen for sure yet, especially during the next 67 days (Wonder why!?), but it does show us all what this so-called recovery is doing – its not recovering. Saying its “far from satisfactory” is about as negative as any Chairman of the Fed ever explains a situation, and talk of an imminent meltdown on Wall Street do not bode well, for anyone!
By Robin Harding in Jackson Hole – FT.com
Ben Bernanke took another step on the US Federal Reserve’s march towards more monetary easing with a speech that said the economic situation was “far from satisfactory”.
Speaking at the Fed’s annual gathering in Jackson Hole, Wyoming, Mr Bernanke offered no direct promise of further easing. But he spelt out the feeble state of the economy, the Fed’s intention to be forceful, and that it has effective policy tools available.
“Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labour market conditions,” said the Fed chairman.
The clearest hint that Mr Bernanke is ready to do more came from his disappointment with the economy’s progress. He noted some recovery over the past few years but said that improvement in the labour market had been “painfully slow”.
Growth in recent quarters had been “tepid”, he said, and “unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time”.
By midday in New York, the S&P had rebounded from a drop after Mr Bernanke’s comments, to trade higher by 0.7 per cent. The 10-year Treasury note rose, pushing its yield 5 basis points lower to 1.58 per cent, as markets decided that Mr Bernanke’s comments did signal further easing.
Much of the speech was taken up with a review of the Fed’s actions since the financial crisis. Mr Bernanke argued that large-scale asset purchases aimed at driving down long-term interest rates – known as quantitative easing, or QE – have worked.
“A balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks,” said Mr Bernanke.
Mr Bernanke reviewed four possible costs of additional asset purchases: damaging the function of securities markets, raising inflation expectations, undermining financial stability or causing the Fed to make financial losses.
He said those costs were uncertain, but concluded: “At the same time, the costs of non-traditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.”
“The speech comes across as a staunch defence of the effectiveness of unconventional monetary policy,” said Paul Dales of Capital Economics in London, arguing that Mr Bernanke had paved the way for QE3.
Mr Bernanke argued that the Fed’s forecasts of future interest rates – it currently expects rates to stay low at least through to late 2014 – had made people realise “how forceful the FOMC intends to be in supporting a sustainable recovery”.
In one possible hint of future policy, he said that the current late-2014 date “is broadly consistent with prescriptions coming from a range of standard benchmarks”, but that “a number of considerations also argue for planning to keep rates low for a longer time than implied by policy rules developed during more normal periods”.
That could imply a Fed policy of extending the forecast date into 2015 while making clear that it reflects a change in the central bank’s intentions rather than any downgrade to the economic outlook.