Bernanke Doesn’t Signal More Stimulus
Federal Reserve Chairman Ben S. Bernanke said the central bank still has tools to stimulate a recovery that has been weaker than forecast while sticking to his view that growth will pick up.
Bernanke, in a speech today to central bankers and economists at an annual forum in Jackson Hole, Wyoming, didn’t give details on the measures the Fed might take or signal when or whether policy makers might deploy them. A second day has been added to the next Federal Open Market Committee meeting in September to “allow a fuller discussion” of the economy and the Fed’s possible response, Bernanke said.
Bernanke said the recovery is likely to improve in the second half of this year as he sought to reassure investors and the public that U.S. growth is safe in the long run and that the Fed can aid the recovery if needed. Bernanke didn’t close the door in today’s speech to options he has previously discussed, including a third round of government bond buying.
“The Federal Reserve has a range of tools that could be used to provide additional monetary stimulus,” Bernanke said. The FOMC after its Aug. 9 meeting pledged for the first time to keep its benchmark interest rate at a record low at least through mid-2013 to energize a recovery that’s “considerably slower” than anticipated.
The Standard & Poor’s 500 Index initially extended losses, then erased them, rising 1.5 percent to 1,177.11 at 1:22 p.m. in New York. Stocks rallied earlier this week on speculation that Bernanke would telegraph more monetary stimulus. Yields on 10- year Treasuries fell to 2.18 percent today from 2.23 percent yesterday.
Bernanke 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.”
“Although important problems certainly exist, 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. “It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals.”
The FOMC this month said that it was “prepared to employ” additional tools “as appropriate” to aid the economy.
In today’s speech, Bernanke, 57, repeated that line from the statement without elaborating on the options, in contrast to last year’s talk at the Jackson Hole event, when he discussed several tools, including asset purchases. “We discussed the relative merits and costs of such tools at our August meeting,” Bernanke said today.
All It Can
The next FOMC meeting, originally scheduled to begin and end Sept. 20, will now conclude Sept. 21, Bernanke said. He closed his remarks with the line that the Fed “will certainly do all that it can to help restore high rates of growth and employment in a context of price stability.”
“Economic performance is clearly subpar, and from that standpoint the case for some sort of further economic-policy assistance is just being made by the poor performance,” said Keith Hembre, chief economist and investment strategist in Minneapolis at Nuveen Asset Management, which oversees about $212 billion.
Still, while Bernanke said the Fed has stimulus tools left, “the threshold to utilizing them is going to require fairly different conditions than what we have today,” such as lower inflation or a resurgence in financial instability, Hembre said.
Bernanke, a former Princeton University economist, repeated his call for Congress to adopt a “credible plan for reducing future deficits over the longer term” without harming U.S. growth in the near term.
He also said that the “extraordinarily high level of long- term unemployment” adds urgency to the need to boost job growth. At the same time, the Fed can’t do it alone: “Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” Bernanke said.
Last year, the Fed chief used his Jackson Hole speech to lay the groundwork for a second round of bond purchases, also known as quantitative easing. The central bank decided in November to buy $600 billion of Treasuries through June 2011.
“The lack of a QE3 outline today, to the extent that is disappointing to some, does not mean that outline is not coming in the future,” Dan Greenhaus, chief global strategist at New York-based brokerage firm BTIG LLC, said in a research note.
Bernanke said in June that one difference between this year and last August was that in 2010, “inflation was very low and falling” and deflation was a “nontrivial risk.” The Fed’s asset purchases “have been very successful in eliminating deflation risk,” he said at a press conference.
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.
Even with joblessness at 9.1 percent, any push to buy more bonds risks a backlash from critics inside the Fed and in Congress who say the Fed’s policies have done little to spur the economy and may fuel inflation.
Less than two hours before Bernanke’s speech, the government reported that the economy expanded at a 1 percent annual rate in the second quarter, compared with an initial estimate of 1.3 percent growth. The reduction reflected a smaller increase in inventories and fewer exports.
“Although we expect a moderate recovery to continue and indeed to strengthen over time, the Committee has marked down its outlook for the likely pace of growth over coming quarters,” Bernanke said today without specifying the forecast.
The housing market, which has been a “significant driver” of U.S. post-recession growth rebounds since World War II, is slowing the “natural recovery process” now, Bernanke said.
Also, “financial stress has been and continues to be a significant drag” on growth, Bernanke said, acknowledging that “bouts of sharp volatility and risk aversion in markets have recently re-emerged in reaction to concerns about both European sovereign debts and developments related to the U.S. fiscal situation.”
The Fed’s Aug. 9 decision means that in what Fed officials judge to be the “most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years,” Bernanke said today.
Bernanke pushed through the decision over opposition from three regional Fed presidents who preferred that the Fed stick with its previous commitment to hold rates for an unspecified “extended period.”
The dissents from the presidents of the Federal Reserve banks of Philadelphia, Dallas and Minneapolis marked the most opposition Bernanke has encountered since he took the Fed’s helm in February 2006.
The FOMC at its August meeting offered a dimmer view of the economy, noting a “deterioration in overall labor-market conditions in recent months” and that household spending had “flattened out.”
Hiring has slowed as employers lost confidence in the recovery and governments reduced positions. Average monthly payroll gains dropped to 72,000 in the three months through July, from 215,000 in the prior three months. The jobless rate fell to 9.1 percent in July from 9.2 percent in June as Americans gave up looking for work.
Besides buying government bonds, the Fed could cut the 0.25 percent interest rate it pays bank on the $1.6 trillion in excess reserves parked at the Fed. It also could replace shorter-term securities with longer maturities, which may help lower interest rates on mortgages and other long-term debt. The Fed also could pledge to keep its balance sheet near a record high of $2.86 trillion for an “extended period” or for a specific time period.
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