At Jackson Hole, Ben Bernanke hints, but offers no certainty of action to come

September 1, 2012

At an economic conference in Jackson Hole, Wyo., Federal Reserve Chairman Ben S. Bernanke said Friday that the central bank intends to act forcefully to support the nation’s recovery, The Post’s Zachary A. Goldfarb reports :

In his widely anticipated remarks at the Jackson Hole economic summit, Bernanke did not say that action was imminent, but he used uncharacteristically direct and forward-looking language to suggest that the Fed could soon act to bolster growth and lower unemployment.

The Fed chairman said the central bank intends to be “forceful . . . in supporting a sustainable recovery.” With Europe’s financial crisis and the United States’ looming budget cuts and tax hikes posing major risks for the recovery, he said, economic growth is “far from satisfactory,” and he pledged the Fed will take additional steps to help the economy as needed.

As is common of Fed pronouncements, Bernanke hinted but offered no certainty of action to come. Still, the urgent tone of his remarks will leave investors disappointed if the Fed does not launch new stimulus at its Sept. 12-13 policymaking meeting. Investors seemed hopeful, with stocks trending up by about 1 percent in the early afternoon.

“We must not lose sight of the daunting economic challenges that confront our nation,” Bernanke said. “The stagnation of the labor market in particular is a grave concern, not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.”

“The Federal Reserve has acted to support economic growth and foster job creation,” he added, “and it is important to achieve further progress, particularly in the labor market.”

Bernanke’s speech seemed carefully designed to build on two other suggestions this month that the Fed is strongly considering new action. After an early August policymaking meeting, the Fed declined to take new steps to stimulate growth but committed itself to doing so if needed to help the economy. Minutes from that meeting released last week said that many Fed officials favor more action if the economy does not improve soon.

In his speech, Bernanke also warned there would be risk in more action, but he said the bank could handle it, Associated Press reports :

The Fed “should not rule out” new policies to improve the job market, he said.

The most dramatic step the Fed could take would be another round of bond buying. This is known as quantitative easing, or QE. In two rounds of QE, the Fed bought more than $2 trillion of Treasury bonds and mortgage-backed securities. Many investors have been hoping for a third round — QE3— to be unveiled as soon as the Fed’s next policy meeting in September.

In light of Bernanke’s comments Friday, some analysts said that might be a stronger possibility now.

“Bernanke has taken a further step along the path to more policy stimulus, most likely a third round of asset purchases (QE3) to be announced at the mid-September FOMC meeting,” said Paul Dales, senior U.S. economist at Capital Economics.

At the same time, the Fed chairman avoided hinting of any one policy move or any timetable.

“This is really all he could say,” says Steven Ricchiuto, chief economist at Mizuho Securities. “He is not at liberty to promise anything without the (policy) committee’s approval, and there seems to be various opinions on the committee about the best way forward.”

In his speech, Bernanke cited studies showing that the Fed’s first two rounds of bond purchases created at least 2 million jobs.

“It is important to achieve further progress, particularly in the labor market,” Bernanke said. “The Federal Reserve will provide additional policy accommodation as needed.”

So, what does Bernanke see as the nation’s big problems, Wonkblog’s Dylan Matthews asks :

In short, a housing market that hasn’t fully recovered, austerity at both the federal and state levels, and the looming crisis in Europe. All three are holding back recovery, the first by hurting a key area of consumer spending, the second by hurting employment in both the government sector and those private businesses that rely on government spending, and the last by reducing confidence in credit markets, making it harder for businesses to get capital. So what’s he going to do?

Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

That’s vague, and probably purposefully so. But coming after a long argument that quantitative easing has worked in recent years, and a rejection of structural arguments that, if correct, mean that more easing will be ineffective, it’s hard not to see it as an indication that more aggressive Fed action is on the way.

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