For Fed watchers, Ben Bernanke’s address at this year’s monetary policy conference hosted in Jackson Hole, Wyo., contained something of a surprise.
In his speech, “Monetary Policy Since the Onset of the Crisis,” he reviewed the Fed’s policy action during and since the economic crisis, gave a quick summary of what’s keeping the economy in its sluggish state, noted some potential downsides to the Fed’s approach, and concluded that, overall, the unconventional policy actions of the Fed have been worthwhile and that more could be coming if conditions warrant. And while that doesn’t sound like a big deal, it’s being widely seen as a signal that more Fed action is on the way—and soon.
There was no explicit announcement that more policy moves—like buying up long-term Treasury and Fannie and Freddie debt in order to bring down long-term interest rates and get investors to purchase different types of financial instruments—were forthcoming. But then again, the last time a speech signaled the onset of a large round of debt purchases, known in central-banking parlance as “quantitative easing,” it was delivered by Bernanke at the same conference two years ago. And the two speeches are remarkably similar.
Bernanke’s speech two years ago, “The Economic Outlook and Monetary Policy,” was widely interpreted as a signal that unconventional Fed action was coming and kicked off a real and sustained stock-market rally. But there was no actual announcement; for that, one had to wait two months, until the beginning of that November. But The New York Times write-up of the speech at the time said that it “signaled once again on Friday that the central bank was prepared to act if the economy continued to weaken.” The stock market responded immediately, with the Dow jumping 164 points and kicking off a long rally.
Today’s speech is being interpreted similarly. The Times noted that Bernanke “delivered on Friday a detailed and forceful argument for new steps to stimulate the economy, reinforcing earlier indications that the Fed is on the verge of action.” Bill Gross, head of the Newport, Calif.-based investing giant PIMCO, read the speech and said it was clear evidence that Bernanke was ready to “go out with his guns blazing” with bond purchases. Jon Hilsenrath, the Wall Street Journal’s Fed reporter, wrote that “taken together, the speech sounds a lot like Mr. Bernanke’s closing argument in favor for more easing.”
And when you read the speech, it is easy to see why so many think that Bernanke was setting the groundwork for another round of bond buying, even if it’s wrapped up in the sleep aid that is the language of central bankers. After all the, the strongest direct statement hinting at further easing is this line: “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.” Like Bernanke’s 2010 speech, today’s speech was mostly a description of what Fed action can do and the economic background against which the Fed would be making its decisions.
This speech’s key claims were that past rounds of bond purchases had worked, the labor market is still weak, and that it can be improved meaningfully through immediate action.
In fact, Bernanke referenced research showing that bond purchases had been “economically meaningful” and that each round had managed to lower the yield of Treasury bonds and had directly nudged stock prices up, as investors shifted from lower-yielding debt to riskier company stocks. The boldest claim Bernanke made in defense of the Fed’s unconventional actions were that they “may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.” Furthermore, Bernanke argued that there was “little evidence of substantial structural change” that would keep unemployment elevated despite action to alleviate it.
He did outline four possible downsides to bond purchases by the Fed, but concluded that the potential downsides were not all that great, and that the Fed had the proper tools to deal with them. Bernanke concluded this part of the speech by pointing out that the Fed had actually made a $200 billion profit that it handed over to the Treasury in the last three years; but more importantly that the actual fiscal position of the Fed was not as important as the effect its actions had on the broader economy, saying that “monetary policy can achieve the most for the country by focusing generally on improving economic performance” rather than focusing on “possible gains or losses on the Federal Reserve’s balance sheet.”
Overall, Bernanke concluded, the costs from nontraditional policies “appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.” Also, Bernanke emphasized the costs of continued high unemployment, saying toward the end of the speech, “The stagnation of the labor market in particular is a grave concern … because of the enormous suffering and waste of human talent it entails” and that “persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.”
The Fed, Bernanke said, “may have raised the level of output by almost 3 percent.”
So, we have a continued problem that is causing great human suffering and will continue to do great damage, we know that we can do something about it, and the risks of those actions are manageable.
If that were really all the case, then you’d have to take action, right?