- James I. Clark III
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Bernanke: No QE3
Federal Reserve Chairman Ben Bernanke, in a long-awaited speech in Jackson Hole, WY, announced no new steps the Fed will take to prop up the shaky U.S. economy. Rather, he expressed optimism that the economy will continue to recover, based on its inherent strength and from assistance provided by the central bank. Bernanke restated the Fed’s determination to keep the federal funds rate “exceptionally low” for a minimum of two years. He did not say what many had been hoping to hear: that the Fed would begin another round of quantitative easing – usually referred to as QE3.
Bernanke said that he expected inflation to remain at or below two percent. Additionally, he acknowledged that the recent downgrade of the nation’s AAA credit rating had undermined both “household and business confidence.” He implied that there was only so much more the Fed can do to stimulate the economy, and that the time has come for Congress and the Obama administration to create “policies that support robust economic growth in the long term,” to reform the nation’s tax structure and to control spending.
“In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September,” Bernanke said. He went on to clarify the Fed’s guidance about how long interest rates will remain exceptionally low. “In what the committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years.”
As Bernanke delivered his remarks, the government cut its estimated 2nd quarter GDP growth to a paltry rate of one percent, a revision from the 1.3 percent previously reported. The revision was expected and primarily due to weaker exports. In more positive news, private spending and investment in April through June were slightly higher than initially estimated. The GDP grew by an annual rate of just 0.4 percent in the 1st quarter. The 2nd half of 2011 is expected to be somewhat stronger, but a major driver of the economy — consumer spending — remains weak amid slow hiring and sluggish income gains.
“This economic healing will take a while, and there may be setbacks along the way,” Bernanke said. “Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery. Although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years,” Bernanke said. “It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals.”
“Economic performance is clearly subpar, and from that standpoint the case for some sort of further economic-policy assistance is just being made by the poor performance,” said Keith Hembre, chief economist and investment strategist in Minneapolis at Nuveen Asset Management. Although Bernanke said the Fed has stimulus tools left, “the threshold to utilizing them is going to require fairly different conditions than what we have today,” such as lower inflation or a return of financial instability, Hembre said.
Bernanke also used the occasion to scold Congress for its tardiness in resolving the deficit debate. “The country would be well served by a better process for making fiscal decisions,” Bernanke said at the Federal Reserve Bank of Kansas City’s annual economic symposium. “The negotiations that took place over the summer disrupted financial markets and probably the economy, as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.” Bernanke implied that a return to economic prosperity is at stake. “I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if — and I stress if — our country takes the necessary steps to secure that outcome,” he said. The budget process, according to Bernanke, would be more effective if negotiators set “clear and transparent budget goals” and established “the credibility of those goals.”
Bernanke reassured investors that United States prospects for growth are sound over the long term and that the Fed has tools to aid the recovery if needed, even though he is not planning another stimulus at this time. “What no action will do is give confidence to investors that things are not as bad as many people perceive, otherwise he would’ve acted,” Keith Springer, president of Springer Financial Advisors in Sacramento, CA, said. “Investors will eventually see the positives.”