Ben Bernanke is not going to jam a new stimulus or easing package in any form of QE3 by the sound of his highly awaited speech in Jackson Hole today. The indication is that, despite a promise that the central bank can do more to help a persistently weak economy, that no fresh move is imminent. In short, no QE3.
As we suspected, Bernanke also did not elaborate on what steps or tools would be used if they need to be used other than that they are available. The September FOMC meeting will be extended to two days to discuss further policy options. This persistently weak economy was reiterated this morning when second quarter GDP was revised to 1.0% rather than 1.3% previously forecast. Add in a 0.4% GDP gain in the first quarter and you have a stagnant economy. That growth is so low that it implies some parts of the economy are already back in recession or are at least are facing contraction.
What Ben Bernanke tried to do was remain positive about the long-term growth prospects even though the two and a half year recovery remains only modest. He is also maintaining that the financial crisis has not killed the major growth drivers in the years ahead. Stronger banks, stronger corporate balance sheets, and a de-leveraged consumer are all acting as a better floor under the economy. He even noted a 15% manufacturing boost from the lows.
The key takeaway is that Jackson Hole was not the forum for a launch of new stimulus or quantitative easing. Bernanke did the right thing and this did not signal that the printing presses were going to be cranked on to fluff up that new money supply. Another takeaway is that Bernanke wants to see the U.S. deficit fixed in a manner that does not hinder the economy.
Bernanke has maintained that credit is more available, although is still tight for some (which means many, and all of the unemployed or foreclosed-upon). He also expects inflation settle in ‘at or under’ the preferred 2.0% rate.
The real question will come down to any after-speech comments from any questions and answers. Our take is that any QE3 was just going to add more insult to injury. There is little proof that QE2 did much to help. Is there more that the Federal Reserve should be expected to do other than have interest rates at 0% and having a 10-year Treasury yield close to 2%? The FOMC cannot (and will not) come to the defense of people who over-borrowed and who bought too much house that they couldn’t afford any time soon. It truly is those people who need credit, but they won’t get it and that is not a role for Fed policy today.
JON C. OGG
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