Jackson Hole Debate on Recession Risk Shows Bernanke Challenge
Economists who decide when recessions begin and end in the U.S. are divided over the odds of a renewed downturn, underscoring the challenge faced by Federal Reserve Chairman Ben S. Bernanke as he vows the Fed “will do all that it can” to sustain growth.
“There’s still a significant risk, maybe one chance in three, that there will be a double dip,” said Harvard University Professor Martin Feldstein, who sits on the Business Cycle Dating Committee of the National Bureau of Economic Research. Fellow panel member and Princeton University Professor Mark Watson said those odds are “way too high” and puts them instead at “one in 10 or maybe one in 20.”
Such differences over the outlook marked discussions of policy makers and economists gathered in Jackson Hole, Wyoming for the Kansas City Fed’s annual symposium. The tone was set by a reduced estimate of second-quarter growth and then by Bernanke’s speech yesterday outlining possible options the Fed could take to ensure the recovery continues.
“There is a searching as to where events are going from here because there has been a slowing in the pace of economic growth,” Henry Kaufman, president of New-York based Henry Kaufman & Co., said in an interview at the conference. “The Fed is at a stage where it is tilting to further accommodation, but it’s not guaranteed.”
Bernanke spoke 90 minutes after the Commerce Department reported the economy grew at a 1.6 percent annual pace in the second quarter, down from an estimate of 2.4 percent issued last month. Minutes before Bernanke’s speech, Intel Corp., the world’s biggest chipmaker, cut its third-quarter revenue forecast, citing weaker-than-expected consumer demand for personal computers in mature markets.
The Standard & Poor’s 500 Index gained 1.7 percent to 1,064.59 as of 4 p.m. in New York, after falling as much as 0.7 percent in the minutes after Bernanke’s speech was released. Treasuries fell, sending the yield on the 10-year note up to 2.65 percent from 2.48 percent.
“We see a fragile economy that is growing at a slower pace,” Feldstein said in an interview on Bloomberg Radio’s “The Hays Advantage,” with Kathleen Hays. Writing in an opinion piece in the Washington Post, Mohamed A. El-Erian, Pacific Investment Management Co.’s chief executive officer, called recent data “alarming” and a sign the recovery is losing momentum.
With its benchmark interest rate already near zero, the Fed has few tools left to boost the economy, said Nouriel Roubini, the New York University professor who forecast the U.S. recession more than a year before it began.
“We are running out of policy bullets,” Roubini said in an interview on Bloomberg Radio from New York, adding that additional large-scale purchases of securities won’t jumpstart growth.
Bernanke disputed the notion that the Fed is out of ammunition, saying in his speech that “should further action prove necessary, policy options are available to provide additional stimulus.”
The Fed chairman also provided his most detailed analysis yet of three options open to the Fed: further purchases of securities, a change in its policy statement and a reduction of the interest rate the Fed pays on banks’ excess reserves.
The Fed this month decided to keep its holdings at $2.05 trillion by reinvesting proceeds from maturing agency and mortgage-backed securities in Treasuries to support a slowing economic recovery. The Federal Open Market Committee, which next meets Sept. 21, held the main interest rate unchanged at zero to 0.25 percent, where it’s been since December 2008.
Bernanke may still be reluctant to ease monetary policy further with unconventional steps in the near term, former Fed Vice Chairman Alan Blinder said. “He is not on the verge of doing anything,” said Blinder, who now teaches at Princeton. “I thought he was relatively pessimistic about the efficacy of the actions.”
Papers published at the Jackson Hole conference reinforced the gloom enveloping the world’s largest economy. It and other advanced economies may face a decade of slow growth and high unemployment if the aftermath of the 2007 financial crisis tracks other post-crisis recoveries of the past century, wrote Carmen Reinhart, a University of Maryland professor, and husband Vincent Reinhart, a former Fed monetary-affairs director.
“There is little reason to expect that looking forward as we do, the next seven years, the next 10 years, will be upbeat, or uplifting years as far as growth and employment,” Carmen Reinhart said in a Bloomberg Television interview.
In a paper written with Harvard’s James Stock, Princeton’s Watson concluded that the U.S. inflation rate by the second quarter of next year is “expected to drop” 0.5 percentage point from the second quarter of this year as disinflation forces build.
Stock nevertheless said the economy will keep growing, while Watson, another member of the NBER committee, said a renewed recession is “quite unlikely” because of the absence of a major shock. The NBER committee in April issued a statement that it was too soon to declare an end to the recession that began in December 2007.
“I tend to be cautiously optimistic about growth,” said Stock. “Everyone is disappointed, but it’s quite unusual to see declines in the U.S. economy that are not associated with major shocks.”