Bernanke May Seek Consensus on Easing
Federal Reserve Chairman Ben S. Bernanke’s decision to extend next month’s policy meeting to two days stoked speculation the extra time may allow him to forge a stronger consensus on monetary easing.
Bernanke, in a speech yesterday at the Fed’s annual forum in Jackson Hole, Wyoming, said adding a second day to the September gathering would “allow a fuller discussion” of the slowing economy and the central bank’s possible response. He said the Fed still has tools to boost growth, without specifying what they were or whether they would be deployed.
“The move to a two-day meeting means he’ll work to build consensus” after confronting the most dissent during his tenure last month, Diane Swonk, chief economist at Chicago-based Mesirow Financial Inc., which oversees about $57 billion in assets, said in an interview at Jackson Hole. “They will end up with QE3, but probably not in September,” she said, referring to a third round of bond purchases, also known as quantitative easing. “They will edge closer to it in the September statement.”
U.S. stocks rose yesterday after initially extending losses following Bernanke’s lack of a clear signal of additional stimulus measures. Bernanke said the recovery is likely to improve in the second half of this year, and he sought to reassure investors and the public that U.S. growth is safe in the long run.
The Standard & Poor’s 500 Index gained 1.5 percent to 1,176.80 at the 4 p.m. close of trading in New York. Yields on 10-year Treasuries declined to 2.19 percent from 2.23 percent the day before.
Previous two-day meetings have seen a higher probability of steps to cut borrowing costs, economists at Goldman Sachs Group Inc. (GS) said. St. Louis Fed President James Bullard said adding a second day to the September meeting allows more time to review easing options, though rising inflation may prevent action in the near term.
“If the economy is weaker and the inflation picture moderates, we could consider more action,” Bullard said yesterday in a Bloomberg Radio interview in Jackson Hole. “The call is much more difficult this year than last year. We have a much different inflation situation than last year.”
The Fed’s preferred inflation gauge, which excludes food and energy prices, rose 1.3 percent for the 12 months ending in June. That’s up from a record low increase of 0.9 percent for the 12 months ending in December.
Laying the Groundwork
Last year, the Fed chief used his Jackson Hole speech to lay the groundwork for a second round of bond purchases. The central bank decided in November to buy $600 billion of Treasuries through June 2011.
Now, the Fed “needs to discuss the issue of bond buying and figure out how to frame and sell it,” Swonk said.
Less than two hours before Bernanke’s speech, the government reported that the world’s largest economy grew less than previously estimated in the second quarter, capping the weakest six months of the recovery that began in mid 2009. Gross domestic product climbed at a 1 percent annual rate, compared with an initial estimate of 1.3 percent growth.
The next Federal Open Market Committee session, previously scheduled to start and end Sept. 20, will now conclude Sept. 21. The change adds a fifth two-day meeting to this year’s calendar, leaving three one-day sessions in March, August and December.
Bernanke’s practice each year starting in 2007 has been to hold four two-day sessions, where Fed governors and regional presidents present updated economic projections, and four one- day meetings. The committee meets about every six weeks.
The Fed chief expanded the December 2008 meeting to two days from one and proceeded to lower the benchmark interest rate to near-zero from 1 percent. In February 2009, he added a second day to the four one-day sessions that year; the Fed then agreed at a two-day meeting in March 2009, originally scheduled for one day, to more than double purchases of mortgage debt and start buying $300 billion of Treasuries.
After its last meeting on Aug. 9, the FOMC pledged for the first time to keep its key rate at a record low at least through mid-2013 to energize a recovery it said was “considerably slower” than anticipated. Three of the panel’s 10 members voted against that decision, preferring to maintain a previous pledge to keep rates low for an “extended period” without a specific timeframe.
Bernanke yesterday said that while the slumping housing market and financial-market volatility still pose challenges for the economy, his view of the long-term outlook is “more optimistic.”
“The growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years,” Bernanke said at the mountainside symposium hosted by the Kansas City Fed.
Bernanke, 57, a former Princeton University economist, said the debate over raising the U.S. debt limit “disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.”
The move to a two-day September meeting was yesterday’s “one bombshell” from Bernanke and may give the Fed more time to discuss current or new policy tools, said John Canally, who helps oversee $340.8 billion as an economist and investment strategist at LPL Financial Corp. in Boston.
The FOMC this month said that it was “prepared to employ” additional tools “as appropriate” to aid the economy.
Bernanke yesterday repeated that line from the statement without elaborating on the options, in contrast to last year’s talk at Jackson Hole, when he discussed several tools, including asset purchases.
“We discussed the relative merits and costs of such tools at our August meeting,” Bernanke said yesterday.
John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said he heard Bernanke stress the September meeting while delivering the remarks. The forum was open only to invited guests and wasn’t broadcast.
“There was particular emphasis on the September meeting” in Bernanke’s voice, Silvia, who attended, said in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene.
The Jackson Hole symposium concludes today with talks from European Central Bank President Jean-Claude Trichet and Christine Lagarde, managing director of the International Monetary Fund. They will participate in a session on setting policy priorities for long-run economic growth.
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