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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A more optimistic way to look at it is that, “if economic data get better, we don’t need QE3; if they get worse, QE3 will help to boost it up”. Either way the down side risk will be limited. Well, I’m still thinking that the volatility will come back very soon and the market could easily drop 10+%. But for the longer term (say 5-10 yr), I’m not worrying at all. That means every 10% dip of the market will be the opportunity to buy.
GOLD has rallied Friday…so they think QE3 is coming
i am buying all European equities ..
Each new QE move by the Fed has been less effective than the one before, and they know it. While I’m sure it’s still true that actions by the Fed take several months to work their way into the economy, market reactions have been somewhat perverse to these experimental QE actions. There’s been a brief positive response to them with no follow through in the later time frame where it’s hoped they might have a real economic impact. I think everyone knows by now that these short versus long bond manipulations are not proving as effective as real interest rate cuts, “the traditional policies”, would be, you can’t cut below zero. The fact that bonds are still popular at rates that will almost certainly result in a long-term negative return (unless holders can time the toss of the hot potato perfectly) sort of argues that negative interest rates exist even if they are theoretically impossible.
To use an over-worked analogy, the Fed knows it’s holding a revolver full of blanks. They are trying to decide whether it’s better to shoot one off in the near future hoping to startle a few entities into desired reactions, or to just keep waving it about in the hopes that some entities think it might still have a loaded round in the next chamber.
Yclept, to follow your logic, the smartest thing the Fed and the ECB could do, then, is to promise action but not act. That way the market remains hopeful that the central banks might bail out the global economy but the banks don’t reveal that their actions have only minor positive outcomes.