PinnacleBank New Platform: We have made substantial investments and enhancements to our credit card processing platform. Learn more here about how it may effect your services.
Bernanke is more optimistic than we are. The following is a synopsis of his speech. Through the lens of FTN’s economic expectations, it amounts to a promise of full-blown quantitative easing. That is, the Fed is likely to expand its purchase program and begin adding to its balance sheet again.
Looking back at the year since the last Jackson Hole conference, Ben Bernanke says, “growth during the past year has been too slow and joblessness remains too high. Financial conditions are generally much improved, but bank credit remains tight; moreover, much of the work of implementing financial reform lies ahead of us. Managing fiscal deficits and debt is a daunting challenge for many countries, and imbalances in global trade and current accounts remain a persistent problem.” This is the starting point from which policy makers must think about the work yet to be done.
Turning to the current state of the economy, Bernanke said:
Looking ahead: “Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place.”
“Although output growth should be stronger next year, resource slack and unemployment seem likely to decline only slowly. The prospect of high unemployment for a long period of time remains a central concern of policy. Not only does high unemployment, particularly long-term unemployment, impose heavy costs on the unemployed and their families and on society, but it also poses risks to the sustainability of the recovery itself through its effects on households’ incomes and confidence.”
Well said. The Fed is charged with stabilizing prices AND promoting full employment for a reason. Bernanke is saying that the unemployment rate, not the inflation rate, will be the Fed’s primary focus in the year ahead. But, Bernanke went on to say the Fed will not ignore inflation risks. Right now, however, inflation is lower than the FOMC considers healthy.
On current Fed policy: “By agreeing to keep constant the size of the Federal Reserve’s securities portfolio, the Committee avoided an undesirable passive tightening of policy that might otherwise have occurred.” In case you missed the WSJ article, the Fed is not really easing policy by investing in Treasuries, it is stabilizing policy.
On future policy: “the Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly. The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do. As I will discuss next, the issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool.”
Policy options for further easing: “Notwithstanding the fact that the policy rate is near its zero lower bound, the Federal Reserve retains a number of tools and strategies for providing additional stimulus. I will focus here on three that have been part of recent staff analyses and discussion at FOMC meetings: (1) conducting additional purchases of longer-term securities, (2) modifying the Committee’s communication, and (3) reducing the interest paid on excess reserves. I will also comment on a fourth strategy, proposed by several economists–namely, that the FOMC increase its inflation goals.”
On these, he said:
What the Fed will do going forward: “First, the FOMC will strongly resist deviations from price stability in the downward direction. Falling into deflation is not a significant risk for the United States at this time, but that is true in part because the public understands that the Federal Reserve will be vigilant and proactive in addressing significant further disinflation. It is worthwhile to note that, if deflation risks were to increase, the benefit-cost tradeoffs of some of our policy tools could become significantly more favorable.”
“Second, regardless of the risks of deflation, the FOMC will do all that it can to ensure continuation of the economic recovery.”
Chris Low
Although this information has been obtained from sources, which we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results while changes in any assumptions may have a material effect on projected results.