By Robin Harding in Jackson Hole – August 31, 2012 6:25 pm
Ben Bernanke sent a clear signal that the US Federal Reserve was ready to do more to support the US economy, saying that its condition was “far from satisfactory”. Speaking at the Fed’s annual gathering in Jackson Hole, Wyoming, Mr Bernanke offered no direct promise of further intervention. But by spelling out the feeble state of the economy, the Fed’s intention to be forceful and its range of policy tools, he raised expectations of action in September.
“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 labour market conditions,” said the Fed chairman on Friday.
The clearest hint that Mr Bernanke is ready to do more came from his disappointment with the economy’s progress. He noted some recovery over the past few years but said that improvement in the labour market has been “painfully slow”.
He said “unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time”.
Much of the speech was taken up with a review of the Fed’s actions since the financial crisis. Mr Bernanke argued that large-scale asset purchases aimed at driving down long-term interest rates – known as quantitative easing, or QE – have worked.
“A balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks,” he said.
Mr Bernanke reviewed four possible costs of additional asset purchases. He said they could damage the function of securities markets, raise inflation expectations, undermine financial stability or cause the Fed to make financial losses. He said those costs were uncertain, but concluded: “At the same time, the costs of non-traditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.”
Paul Dales of Capital Economics in London, arguing that Mr Bernanke had paved the way for a third wave of quantitative easing, said: “The speech comes across as a staunch defence of the effectiveness of unconventional monetary policy.”
By midday, the S&P had rebounded from a drop after Mr Bernanke’s comments, and closed up 0.5 per cent. The 10-year Treasury note rose, pushing its yield 5 basis points lower to 1.58 per cent, as markets decided Mr Bernanke’s comments did signal further easing.
Mr Bernanke argued that the Fed’s forecasts of future interest rates – it anticipates rates staying low at least until late 2014 – illustrated its resolve in supporting a recovery.
In one possible hint of future policy, he said that the current late-2014 date “is broadly consistent with prescriptions coming from a range of standard benchmarks”, but that “a number of considerations also argue for planning to keep rates low for a longer time than implied by policy rules developed during more normal periods”.
That could imply a Fed policy of extending the forecast date into 2015 while making clear that it reflects a change in the central bank’s intentions rather than any downgrade to the economic outlook.