Bernanke Disappoints Markets On QE3
Fed Chairman Ben Bernanke gave another one of his "innovative" press conferences this afternoon, reiterating that the US economy is recovering only weakly, and ruling out, for the time being at least, another round of quantitative easing. Thus the press conference didn't really provide any new news, and the stock market seemed unimpressed, trading down a bit as the meeting progressed, then collapsing in the remainder of the day.
The core of the message was that the economy is still recovering only slowly, enough that the Federal Open Market Committee (FOMC) members have cut their forecasts of US economic growth by a half of a percentage point, to an average of 2.7 to 2.9 percent for 2012, and 3.7 to 3.9 percent for 2012.
Earlier in the day the Fed gave these views of the US economy:
- Recovery continues but weaker than expected
- Employment weaker than expected
- Causes of weakness may be temporary - higher fuel and food
- Inflation is up a bit, but expectations are stable
What the markets have been looking for is a signal that the Fed will undertake another round of quantitative easing.
The release this morning said only that the last round of QE was coming to an end, and that the Fed won't be selling the securities it has bought in the process.
In the meeting, however, Chairman Bernanke did point out that employment and inflation are much better now than they were when he first started talking about quantitative easing. To me, at least, it sounded as though we can rule out another QE for a while.
This morning, however, expert bond manager Bill Gross of Pimco predicted via Twitter that the Fed will be announcing a third go-round on QE at the next big meeting of bankers in August at Jackson Hole, Wyoming:
Gross, the co-chief investment officer of PIMCO, the world's top bond manager, on Wednesday said on Twitter: "Next Jackson Hole in August will likely hint at QE3 / interest rate caps."Bill Gross is often right, but not always, and Mr. Bernanke reinforced the point that nothing is in the works for quantitative easing.
He also commented, if only indirectly, on current political debate regarding budget deficits. "I don't think sharp cuts in the deficit would create jobs," he offered, saying that cuts at the state and local government level and withdrawal of federal stimulus had already proved a drag on the economy. "Our budget problems are long run," he said: "A focus on the near term is not optimal."