Bernanke: No Changes in Policy for Now
No surprises in Federal Reserve Chairman Ben Bernanke's speech from Jackson Hole, Wyoming this morning.
He starts off by saying that although it will take time, the economy will eventually recover:
Might not the very slow pace of economic expansion of the past few years, not only in the United States but also in a number of other advanced economies, morph into something far more long-lasting?
I can certainly appreciate these concerns..., however, my own view is more optimistic. As I will discuss, although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years. It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals.If the Fed thought the drop in output and employment was permanent, then policy could not help and there would be little for the Fed to discuss. But if the fall is temporary, i.e. cyclical rather than structural, then it's possible for the Fed to use monetary policy to help the recovery along.
The question is, are they prepared to do so? He says:
Monetary policy must be responsive to changes in the economy and, in particular, to the outlook for growth and inflation. As I mentioned earlier, the recent data have indicated that economic growth during the first half of this year was considerably slower than the Federal Open Market Committee had been expecting...
In light of its current outlook, the Committee recently decided to provide more specific forward guidance about its expectations for the future path of the federal funds rate. ... In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September... The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.So, the Fed did not announce anything specific or even hint that something was in the works (I predicted this earlier today, and explained why this was the likely outcome). They will discuss the possibility of doing more at the next meeting, and let us know, but no changes for now.
He does, however warn that although there long-run budget issues that must be resolved, fiscal contraction to reduce budget deficits in the short-run will make things worse not better. Let's hope Congress listens.
Financial markets are likely to be disappointed by the lack of specific news from the Fed, and they may now be looking for additional action at the Fed meeting in September. But I don't think financial market participants, or anyone else for that matter, should get their hopes up. If the incoming data change substantially, in particular if signs of deflation emerge, the Fed might be prompted to action. But short of that, they will continue in the wait and see mode -- a mode that so far has left them behind the emerging economic conditions.
