Bernanke Doesn't Signal More Stimulus

Fed Chairman details monetary policy tools in Jackson Hole speech.

Federal Reserve Chairman Ben S. Bernanke said the central bank still has tools to stimulate the economy without providing details or signaling when or whether policy makers might deploy them.     

“In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus,” Bernanke said in a speech today to central bankers and economists gathered at an annual forum in Jackson Hole, Wyoming. He said a second day has been added to the next policy meeting in September to “allow a fuller discussion” of the economy and the Fed’s possible response.     

While Bernanke sought to reassure investors and the public that U.S. growth is safe in the long run and that the Fed still has tools to aid the recovery if needed, he stopped short of indicating that the central bank will move ahead with a third round of government bond-buying.     

“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 in prepared comments 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.”                         


Initial Losses     
The Standard & Poor’s 500 Index initially extended losses, then erased them, rising 0.3 percent to 1,162.78 at 11:06 a.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 2.2 percent today from 2.23 percent yesterday.     

“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.                        


Rate Commitment     
The Federal Open Market Committee 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 FOMC 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.     

“The Federal Reserve will certainly do all that it can to help restore high rates of growth and employment in a context of price stability,” he said in the last line of the speech.     

The next FOMC meeting, originally scheduled to begin and end Sept. 20, will now conclude Sept. 21, Bernanke said.     

“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 BTIG LLC in New York, said in a research note, referring to a third round of so-called quantitative easing.                        


‘Credible Plan’     
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. The central bank decided in November to buy $600 billion of Treasuries through June 2011.     

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.                         


‘Stage Is Set’
“The stage is set for a resurgence of inflation if the Fed is not careful,” Senator Richard Shelby of Alabama, the senior Republican on the Senate Banking Committee, said last month.     

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.”                        

Inflation Outlook     
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 Slows     
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.                        

Preferred Gauge     
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.     

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.




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