Ben Bernanke unlikely to announce big new plans at Jackson Hole
By Neil Irwin,
This time a year ago, Federal Reserve Chairman Ben S. Bernanke headed to an annual gathering of central bankers in Jackson Hole, Wyo., amid a faltering U.S. economy, a perilous global situation, and rising calls on Wall Street for the Fed to do something to address both.
Here we go again.
Bernanke is to deliver a speech Friday morning in the same ballroom in the shadow of the Grand Teton mountains where last year he gave a speech that laid the groundwork for a $600 billion program of bond purchases aimed at lifting the economy. The financial world is obsessing over the possibility of another go-round. The thought that Bernanke may offer hints of new steps to boost growth contributed to big gains on Wall Street Tuesday, with the Standard & Poor’s 500-stock index up 3.4 percent.
But those expecting that Bernanke will unveil any big plans are likely getting ahead of themselves. He and other Fed leaders view the current signs of economic weakness differently from how they viewed the economy this time a year ago and want to see more evidence before making their next move.
“He will explain what the Fed has done and the costs and benefits of its remaining policy options,” Michael Feroli, chief U.S. economist at J.P. Morgan Chase, said in a research note. “But we would expect him to leave it at that, and not forcefully signal that a given course of action has already been decided upon.”
Like this time last year, the economic outlook has been deteriorating, and the risk of a dip back into recession rising. On Tuesday, the Commerce Department reported that new- home sales fell to their lowest level in five months in July, and the Federal Reserve Bank of Richmond said its index of manufacturing activity plummeted.
But some other indicators in recent weeks have flashed more positive signs, including encouraging figures for industrial production in July. And unlike last year, recent readings on inflation have come in not far from the 2 percent or so annual level that the Fed seeks. (Last year, inflation was viewed as too low).
The appetite within the Fed for another big, splashy round of so-called QE3 — another bond purchase program in the hundreds of billions of dollars — is low. Many at the Fed are skeptical about the power of further bond purchases to improve the nation’s growth prospects in any significant way.
And there is resistance at the Fed, from Bernanke down, toward more radical measures, such as increasing the central bank’s inflation target. Increasing the target would allow the Fed to pursue expansionary policies, which aim to stimulate the economy, for a longer time without worrying about inflation.
Bernanke may show more openness to modest steps to try to bolster growth, such as reinvesting its current bond holdings into longer-term securities, which could have the effect of helping push down mortgage rates and long-term corporate borrowing.
Even such modest steps could face internal opposition at the Fed. When the central bank’s policy committee decided in early August to say it expects to keep interest rates very low for the next two years, three officials dissented from the decision — the most to dissent since 1992.
In hindsight, last year’s Jackson Hole speech by Bernanke looked like the first step toward the $600 billion QE2 program. But at the time, it was viewed more tentatively; he wasn’t pledging to undertake a program, merely saying that the Fed was willing to do so if the economic data justified it.
After outlining the Fed’s options last August at the annual economic symposium sponsored by the Federal Reserve Bank of Kansas City, Bernanke said that “any deployment of these options requires a careful comparison of benefit and cost.”
In this year’s speech, he is likely to put particular emphasis on what needs to be done to repair the U.S. economy over the longer run, including lowering long-term deficits. The title of the speech, in fact, is “Near- and Long-Term Prospects for the U.S. Economy.”
While Bernanke has said that Congress should not cut the budget deficit too quickly, lest this austerity undermine the weak economic recovery, he has previously argued that a long-term plan to put the government’s spending in line with its revenue could help instill confidence. Indeed, Deutsche Bank chief economist Peter Hooper said in a research note that the need for longer-term adjustments in the economy could be another argument against new Fed intervention.
“Any action the Fed takes at this point may give the markets no more than a temporary lift and would not resolve the more fundamental problems that are weighing on the economy,” Hooper said.