Bernanke Faces Skepticism on Monetary-Policy Tools
Federal Reserve officials face another round of reports projected to show weakening growth amid skepticism they have the firepower to deliver on Chairman Ben S. Bernanke’s pledge to avoid a relapse into recession.
Bernanke, in his Aug. 27 speech to central bankers and economists in Jackson Hole, Wyoming, made his strongest statement yet that the Fed alone can’t keep the recovery going. “Strong and stable” growth will “require appropriate and effective responses from economic policy makers across a wide spectrum” as well as private-sector leaders, he said.
While Bernanke said the Fed’s remaining tools, including asset purchases, will work if needed, some attendees at the annual symposium said during the weekend that the effects of such quantitative-easing measures may be weak or that fiscal policy should play a bigger role. Pressure for action may build this week as economists predict data to show hiring, manufacturing and household purchases cooled further in August.
“There’s now a cost-benefit analysis for future actions which I’d contrast with the ‘whatever it takes’ philosophy of the crisis,” Stanford University Professor John Taylor, creator of an interest-rate formula used by central banks, said in an interview. “The benefits of additional quantitative easing are quite small.”
Economists and central bankers from more than 40 countries began their meeting Aug. 27 as the Commerce Department reported the economy grew 1.6 percent in the second quarter, less than originally estimated, and as Intel Corp., the world’s biggest chipmaker, cut its third-quarter revenue forecast.
The Labor Department’s jobs report for August, to be released Sept. 3, will be a main focus this week. Private payrolls probably rose by 47,000 this month after a 71,000 July gain, while the unemployment rate increased to 9.6 percent from 9.5 percent, according to the median estimate of economists surveyed by Bloomberg News. Factories expanded at the weakest pace in almost a year, an Institute for Supply Management report is forecast to show Sept. 1.
Consumer spending in the U.S. rose more than forecast in July, exceeding gains in incomes. Purchases rose 0.4 percent, the most since March, after little change the prior month, Commerce Department figures showed today in Washington.
At their last meeting on Aug. 10, U.S. central bankers put a floor on asset holdings to keep the Fed’s balance sheet from shrinking by $400 billion by the end of 2011, Bernanke said. The Fed is likely to follow that “baby step” with more stimulus at some point, Alan Blinder, a former Fed vice chairman, told the conference. Blinder likened the unconventional tools to an unwanted relative the Fed would rather put away.
Several papers presented at the conference reinforced concerns the economy is slowing. Using evidence from recoveries in 15 post-crisis economies, Carmen Reinhart of the University of Maryland and Vincent Reinhart of the American Enterprise Institute warned the U.S. and other advanced nations may face weak growth and high unemployment through 2017.
“The Fed may very well be in for another round of easing,” Carmen Reinhart said in a Bloomberg Television interview.
“They’ll need shock and awe to get the attention of market participants,” Vincent Reinhart said on a conference call with reporters today. He estimated that the central bank could purchase “something on the order of $1 trillion” in assets in its next round of easing.
Bernanke wasn’t the sole central banker in Wyoming considering ways to fan an expansion.
The Bank of Japan’s Masaaki Shirakawa returned to Tokyo earlier than planned, and led an emergency meeting today that saw the BOJ boost a lending program for banks by 10 trillion yen ($117 billion). The European Central Bank’s Jean-Claude Trichet may this week extend emergency bank lending programs. Bank of England Deputy Governor Charles Bean said in a paper that “further policy action may yet be necessary.”
Some Fed policy makers are skeptical of the need for further stimulus. “I have long said the recovery would be modest,” Kansas City Fed President Thomas Hoenig, the symposium’s host, said in an Aug. 25 Bloomberg Radio interview. “I think people have to realize that. We are going through major adjustments.”
“I really don’t think that there’s a lot that the Fed can do,” said Martin Feldstein, a professor at Harvard University in Cambridge, Massachusetts, and member of the committee that dates the beginning and end of recessions. While additional asset purchases are probably the best option, “even if they did quite a lot of it, say $1 trillion worth, I don’t think it will have a substantial impact,” he said in an interview.
Richard Berner, Morgan Stanley’s co-head of global economics, said in an Aug. 27 research report from Jackson Hole that greater easing remains a “big step” because the soft patch may be temporary and introducing more stimulus may confuse investors.
Officials also need to better explain their intentions and overcome recent disagreements, Berner and colleagues said in the report, in which they lowered their forecast for growth in the second half of this year by 1 percentage point to a range of 2 percent to 2.5 percent.
‘Prepared to Ease’
Bernanke “clearly indicated that the Fed is prepared to ease monetary policy if needed,” Berner said in the note. “The odds of such action are considerably less than certain however. They will hinge on additional weakness in incoming data.”
The Standard & Poor’s 500 Index gained 1.7 percent after Bernanke’s speech, the biggest increase since Aug. 2. The yield on the 10-year Treasury note had the largest gain since June 2009, increasing 17 basis points, or 0.17 percentage point, to 2.64 percent.
Today, the S&P 500 dropped 1.5 percent to 1,048.92 at 4:15 p.m. in New York. Treasury 10-year note yields slid 12 basis points to 2.53 percent.
To bolster growth, Feldstein and Stanford’s Taylor, both former officials in Republican administrations, advocated extending tax cuts enacted under President George W. Bush that are due to expire at the end of this year.
Eric Leeper, a former Fed economist who teaches at Indiana University, sparked debate with a paper suggesting that central bankers speak out more on the impact of government spending when “an era of fiscal stress” can complicate monetary policy.
‘Place to Start’
Bernanke should have urged the White House and Congress to turn to fiscal policy after the November elections, World Bank President Robert Zoellick said. Examining Social Security, the U.S. retirement-benefits program, “would be a good place to start,” he said.
One remedy that may win broad support is for policy makers to outline a plan to cut the deficit and delay implementing it until the recovery is assured, said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, in an interview.
“We all know that the main gorilla in the room is fiscal policy,” Jacob Frenkel, a former Bank of Israel governor who’s now chairman of JPMorgan Chase International, said during an audience discussion.
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