No Surprises in Bernanke’s Jackson Hole Speech

August 26, 2011

In predictable and balanced remarks, the Fed Chairman generally avoided tipping his hand regarding what the FOMC might do in the near term.  As expected by yesterday, he did not announce any new measure, nor did he go into detail about specific other steps that could be taken.  He’s done that on earlier occasions including his Jackson Hole speech of 2010.  This speech devoted just one paragraph to possible near-term Fed policy, which left open the door to a range of possible decisions dependent on future economic developments.

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, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.

Bernanke’s speech addresses whether the U.S. economy is likely to regain trend growth.  He’s contingently optimistic that it can if necessary steps are taken by policymakers.  I’m less confident about this than he because the start of subtrend growth predated the financial crisis by several years and is thus quite entrenched by now.  Real GDP expanded at a rate of 5.6% per annum in the 1940s, 4.1% in in the 1950s, 4.3% in the 1960s, 3.3% in the 1970s, 3.0% in the 1980s and 3.3% per year in the 1990s.  The economy grew 2.4% per annum over the next 7.5 years and contracted by 0.2% per annum in the four years since the start of the financial crisis.  The 1.6% per annum growth over the 11.5 years since Y2K was less than half as strong as the average 3.6% per annum rate of growth in the second half of the twentieth century.  That’s a bigger shortfall than Bernanke’s optimism implies, and the span of subtrend expansion exceeds a decade.  Moreover, the level of jobs last month was less than a million workers greater than in December 1999.  Over the previous 11.5 years between mid-1987 and end-1999, by contrast, U.S. jobs rose by 29 million.

Bernanke addresses fiscal needs.  He warns that it will be imperative for lawmakers to design a fiscal policy that is sustainable in the long run, yielding a debt/GDP ratio that at worst stabilizes and preferably moves lower eventually.  However, he argues with equal vehemence that this first goal mustn’t be met in a way that augments economic headwinds that are keeping the economy fragile in the short run.  Bernanke doesn’t think these two objectives are incompatible even though this recipe is not embodied in the recent agreement.  He recommends a better process for making fiscal decisions.  That’s going to be extraordinarily difficult to implement within the constraints of the existing U.S. constitution and barring an external threat that unites the fractious political divisions together in a true sense of common purpose.

Over the 75 minutes following the release of Bernanke’s speech, the S&P 500 and DJIA had each gained 1.9% after having fallen in today’s first 30 minutes of trading.  The yield on 10-year Treasuries was six basis points higher.  The dollar had risen 0.3% against the euro, dipped 0.1% against gold, and was unchanged relative to the yen.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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