Bernanke Defends Bond Purchases in Signal of More Fed Easing
Federal Reserve Chairman Ben S. Bernanke, with a little more than a year left in his second term, defended the effectiveness of unconventional monetary policies such as bond purchases and signaled he would soon deploy them again to attack unemployment.
Bernanke’s remarks yesterday to central bankers and economists gathered in Jackson Hole, Wyoming, described the benefits of his signature activism and innovation. They served as a rejoinder to critics outside and inside the Fed, including Richmond Fed President Jeffrey Lacker, who maintain that the returns on his ultra-easy monetary policy are diminishing and may even pose threats such as higher long-term inflation.
The 58-year-old Great Depression scholar, whose term ends in January 2014, left little doubt about his own views on the cost-benefit debate, saying the disadvantages “appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.”
Stocks and Treasuries climbed yesterday and the dollar weakened to a more than three-month low as investors speculated steps to boost the economy may come as soon as this month.
“The one point he made is that these tools work,” said Mark Spindel, founding partner of hedge fund Potomac River Capital in Washington and the former chief investment officer for $15 billion of assets at the International Finance Corp., a member of the World Bank Group. “Given where the economy is, his message was: I am damn well charged with using them.”
The Standard & Poor’s 500 Index advanced 0.5 percent to 1,406.58 at the close of trading in New York. The yield on the 10-year Treasury note slid seven basis points to 1.55 percent. The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, declined 0.55 percent to 81.245 after touching 80.964, the lowest level since May 14.
U.S. central bankers meet Sept. 12-13 and will work up a fresh round of forecasts for the economy and consider what steps are needed to reduce a jobless rate that has been stuck above 8 percent for more than three years. Yesterday, Bernanke said such long periods of unemployment cause “enormous suffering and waste of human talent” and risk wreaking “structural damage on our economy that could last for many years.”
Minutes of the last Federal Open Market Committee meeting show policy makers will consider an extension of a pledge to keep rates low at least through late 2014. They may strengthen the pledge with a description of how they would keep rates low “even as the recovery progressed.” The minutes said “many participants” voiced support for a new round of bond purchases.
In his speech yesterday, the Fed chairman said “the unemployment rate is likely to remain far above levels consistent with maximum employment for some time” unless the economy begins to grow rapidly.
The economy has expanded at an average annual rate of 2 percent over the past six quarters, and a survey of economists by Bloomberg News indicates it’s unlikely to break out of that range soon. Growth will average 2.1 percent next year, according the median forecast in the Aug. 3-Aug. 8 survey, and unemployment will average 7.9 percent.
Inflation is also slipping below the Fed’s goal for stable prices, the second part of its dual mandate from Congress. The measure targeted by central bankers, known as the personal consumption expenditures price index, slowed to a 1.3 percent annual increase in July, the least since October 2009 and below the Fed’s 2 percent goal.
Timing of Move
“We are very close to more” large-scale asset purchases, said Roberto Perli, managing director in charge of policy research at International Strategy & Investment Group in Washington and a former member of the Fed board’s Division of Monetary Affairs. “The question is will they happen at the September meeting, or will they prefer to wait to see if a stronger case can be made later.”
Former Fed Vice Chairman Alan Blinder said in Jackson Hole that he interpreted Bernanke’s speech as a flag for action in September. That would repeat history, given Bernanke used the Kansas City Fed’s annual symposium in 2010 to signal a second round of bond purchases, which was announced the following November.
Bernanke’s $2.3 trillion in bond purchases have left a trail of critics and skeptics, including lawmakers such as House Speaker John Boehner, Republican of Ohio, and Fed historian Allan Meltzer of Carnegie Mellon University.
Inflation is “surely coming down the road,” Meltzer said in an interview last month.
William White, a former executive committee member at the Bank for International Settlements, called today’s low interest rates “one of the greatest economic experiments of all time.” In a paper published on the Dallas Fed’s website, White said a benchmark interest rate kept near zero since December 2008 risks fomenting “malinvestments in the real economy.”
John Ryding, chief economist and co-founder of RDQ Economics in New York, said there’s not much more the Fed can do to boost growth.
“They’re maxed out in terms of tools that can have any impact on the economy,” Ryding said in an interview in Jackson Hole. “Now we’re in danger of doing more monetary stimulus with no positive effect, but with longer-term risk on inflation. But they feel they have to do something.”
The political backlash has also been fierce. Republicans wrote a monetary policy audit into their 2012 platform. Boehner and three other leading Republicans wrote Bernanke last year urging him to “resist further extraordinary intervention” in the economy. Republican Senator Bob Corker of Tennessee said in a press release yesterday that an “unhealthy obsession” with Fed policy is distracting the public from the need for fiscal reform.
“I don’t think action would help the economy very much at all,” Glenn Hubbard, an adviser to Republican presidential candidate Mitt Romney, told Bloomberg Television in Jackson Hole. “There are risks to doing quantitative easing in the sense that it becomes harder at some point to unwind the Fed’s position and it raises political risk by putting the Fed in the crosshairs.”
Fed district bank presidents, including Richmond’s Lacker, Philadelphia’s Charles Plosser and Dennis Lockhart of Atlanta, have also raised concerns about inflation or whether more Fed action would help fuel growth.
At Jackson Hole today, Lacker and St. Louis Fed President James Bullard pushed back against Bernanke’s thesis that the sluggish recovery and persistent unemployment stem more from cyclical weaknesses such as a lackluster housing market than from longer-term structural factors like inadequate worker training.
“It’s quite unhelpful to equate structural and permanent factors,” Lacker said during a discussion at the forum. The gap will eventually close as “people are working on training programs” to address the mismatch in skills.
“Over time these gaps will close but in the meantime these are real costs, real impediments to clearing labor markets the way we want and it’s not clear monetary policy can obviate these costs,” Lacker said.
“The elephant in the room” is “whether the U.S. economy went through a structural shift,” Bullard said. “It could mean that the cyclical adjustment that can be attained in a normal business cycle sense has already happened and that what goes on from here is very different from the ordinary reaction to a recession.”
Bernanke’s 24-page speech yesterday represented an effort to carve out his own position in the debate among central bankers around the world and on his own committee.
The crux of the debate: whether unconventional policies put financial stability and hard-won gains on inflation at risk, or whether they should be mandatory when central banks have pushed rates to nearly zero and are falling short of a mandate to avoid the destructive effects of deflation caused by high unemployment and slow growth.
Bernanke’s audience yesterday included central bankers who are immersed in the topic. They included Germany’s Jens Weidmann, Japan’s Masaaki Shirakawa, Israel’s Stanley Fischer, Charles Bean, deputy Bank of England governor, and Hu Xiaolian, his counterpart in China.
Bernanke said the Fed’s bond purchases have eased credit conditions by lowering yields on corporate debt and mortgage- backed securities. Model-based studies at the Fed suggest the programs increased employment by more than 2 million, he said.
What’s more, Bernanke said, the bond purchases have created “few if any” disruptions to market functioning, and there are no signs that the expanding balance sheet has “materially affected inflation expectations.”
Bernanke found support from Adam Posen, who led the charge for monetary stimulus in the U.K. as a policy maker at the Bank of England before his three-year term ended yesterday.
Posen called on the Fed to pursue more quantitative easing, the European Central Bank to buy the bonds of Spain and Italy and the Bank of England to broaden the assets it buys.
Central banks can also risk their credibility by doing too little in a period of economic underperformance, he said.
“Credibility risk comes more from running a policy that seems to willfully ignore your mandate,” Posen told reporters in Jackson Hole. “When we stop, we should stop when we’ve made enough progress, when we’re meeting our mandates.”
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