US Federal Reserve chairman Ben Bernanke tried to sound an upbeat note on the global recovery at the annual Jackson Hole conference. But he admitted that prospects were “uncertain”. Much of the speech was taken up discussing the Fed’s options. These include buying more bonds in the open market, lowering the interest it pays on bank reserves and making more explicit commitments to keep rates low for longer. Reactions varied, but markets were mostly encouraged, with US equities up 1.5% soon afterwards.
What the commentators said
“Fiddling with the interest on bank reserves and happy talk in the post [monetary policy] meeting, blah-blah, seem pretty meagre antidotes for what ails the economy,” said Alan Abelson in Barron’s. “So it all comes down to quantitative easing and the evidence that it has a real and necessary impact is slim at best. Which suggests, we’re afraid, that the Fed is out of live ammunition.”
Maybe not, said Caroline Baum on Bloomberg.com. That may be what the headlines are proclaiming, but things are less clear cut. So far, Bernanke has described his actions as “easing of financial conditions”. With short-term interest rates near zero, the Fed has tried driving down long-term interest rates by buying longer-dated bonds, hoping to stimulate demand from housing and corporate investment. But Bernanke earned his nickname of ‘Helicopter Ben’ from a 2002 speech in which he argued that deflation could be averted by a large and widespread increase in the money supply. Metaphorically speaking, that’s dropping bills from a helicopter. This is the classic monetarist answer to deflation. Ultimately, if the Fed needed to go further down this road, it still could.
Regardless of whether Bernanke can do more, his speech “hardly suggests that the Fed is anywhere near willing to go all in”, said Paul Ashworth of Capital Economics. While he admits that recent data suggest the recovery has slowed, “he still insists that all the preconditions are in place for a more vigorous recovery, which should be here by next year”. Should things deteriorate significantly, the Fed is clearly prepared to try further stimulus, but even Bernanke doesn’t seem convinced that the milder options discussed would do much. “If economic conditions get a lot worse, the Fed would announce a new programme of Treasury bill/bond purchases and probably put more weight on explicit monetary targets, in the same way the Japanese did.” That might, or might not, have a real impact on the economy – but we’re unlikely to see it tried soon anyway.
That may well reflect dissent in the Fed about whether it’s already gone too far, said The Wall Street Journal. More than a third of members at its latest meeting expressed reservations about simply reinvesting the proceeds from maturing mortgage bonds it already owns. Whether Bernanke would like to go further or not, he may not yet have the support to do so.