Bernanke’s Jackson Hole speech leaves us just about where we were on QE3–waiting for the economic data
Ben Bernanke’s speech at the Kansas City Federal Reserve Bank’s Jackson Hole conference this morning had something for everyone.
In other words you could read the Federal Reserve chairman’s words pretty much anyway you wanted.
Here, for example, is one crucial paragraph describing the state of the Fed’s thinking on launching another round of quantitative easing that would put the Fed back in the business of buying Treasuries or mortgage-backed securities, or something:
“Nontraditional policies have potential costs that may be less relevant for traditional policies. For these reasons, the hurdle for using nontraditional policies should be higher than for traditional policies. At the same time, the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.”
You can read this as saying that the Fed hasn’t ruled out a new program of quantitative easing; or as saying that the Fed doesn’t yet see economic conditions as bad enough to warrant this nontraditional policy; or as saying ….
My read is that with this statement Bernanke is laying more groundwork for a new round of quantitative easing by saying that the Fed will only make that move if economic conditions warrant. That makes the Fed seem reluctant to move and emphasizes the careful consideration the Fed is giving to the costs and benefits of such a move. Any Fed action would, therefore, come only after the most responsible of discussions and only if economic conditions warrant.
So, if we do launch QE3, the Fed is saying, it will be a very studied and careful decision based on the economic facts. Who could have a problem with that?
This leaves the door open to QE3, certainly, and the markets have rallied modestly on that view with the Standard & Poor’s 500 Stock Index up 0.81% to 1410.76 as of noon New York time.
But the rally has been only modest because the markets also realize that Bernanke is saying that the decision on QE3 remains dependent on U.S. economic data. If the U.S. economy strengthens into the fall—and some recent data points have pointed in that direction—a program of quantitative easing becomes less likely. If the economy weakens, the odds of a Fed move go up.
If that sounds like we’re pretty much where we were before Bernanke’s speech, you’re absolutely right.
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