The Message from Jackson Hole
Written by Carl R. Tannebaum
Highlights of the Chairman’s Remarks:
- Nontraditional monetary policy has had a substantial positive impact on economic performance while introducing very limited risk to the financial system.
- Labor market performance remains a significant disappointment, and is due to cyclical factors, not structural factors.
- Headwinds from housing, the fiscal situation, and Europe may suggest more accommodation than implied by simple policy rules.
Chairman Bernanke is but one member of the FOMC, and the August employment report will be closely watched. But we took his remarks today as suggesting that further quantitative easing remains a very real possibility.
While summer technically has three weeks to run, the Labor Day holiday here in the US really marks the end of the season. My kids have been back in school for a week now, the pools will close on Monday, and it’s already dark again when I leave for work in the morning. Oh, and Christmas displays are already starting to appear at selected stores.
It also seems that the pace in business and the markets picks up noticeably after this particular weekend. Most everyone is back at their posts after vacation season, anxious to refresh their understanding of the landscape. In that sense, the Federal Reserve Bank of Kansas City’s Economic Symposium is perfectly timed, providing insight into what we should be thinking about this fall.
The highlight of this annual event is always the keynote from the Chairman of the Federal Reserve System’s Board of Governors. This year’s rendition was entitled “Monetary Policy since the Onset of the Crisis.” In it, Ben Bernanke traced the application of nontraditional tools, which have tripled the size of the Fed’s balance sheet over the past four years.
In addition to the purchases of assets, the FOMC has used communications tools to let investors know that its policy will remain accommodative for a long period of time.
Chairman Bernanke reviewed the early returns on the effectiveness of these programs. Work external to the Fed has attributed an important fraction of the decline in long-term rates since 2009 (when the 10-year US Treasury yield was 4%) to the influence of quantitative easing. Simulations using the Federal Reserve’s economic model suggest that output and employment would have been much lower without these measures.
Beyond the fundamentals, Bernanke noted the psychological benefit provided by these steps. While it is always hard to establish clear cause and effect when diagnosing market trends, the timing of the Fed’s three major programs do seem to correspond closely with the beginnings of upward momentum in the equities markets.
The Chairman then addressed the potential risk of these nontraditional policies, suggesting at each turn that these risks have not been realized.
a) The Fed’s securities purchases do not seem to have disrupted trading patterns in the markets for Treasury or US Agency securities.
b) Worry over the challenges of eventual exit from these purchases has not had any impact on inflation expectations.
c) Excessively easy policy has yet to kindle excesses in any asset market.
The Chairman also noted that taken collectively and over time, the steps taken by our central bank since 2008 will likely make money for US taxpayers.
The remarks then turned to an assessment of current economic conditions. And the language seemed pointed.
“The economic situation is far from satisfactory.”
“The rate of improvement in the labor market has been painfully slow.”
“(G)rowth is being held back currently by a number of headwinds.”
“The stagnation of the labor market is a grave concern…because of the enormous suffering and waste of human talent it entails.”
Chairman Bernanke seemed to cast his sentiment with those who think that lingering unemployment and underemployment have been caused by poor rates of growth, and not by any kind of skills mismatch. He observed that “following every previous U.S. recession since World War II, the unemployment rate has returned close to its pre-recession levels and…I see little evidence of substantial structural change in recent years.”
Bernanke also highlighted that potential risks might cause policy to remain easier than might be suggested by simple decision rules. Fiscal policy (at the state and local levels) and Europe were identified as particular concerns.
Certainly, the Chairman was not going to front-run the FOMC by committing to strong action at Jackson Hole. Indeed, the last sentence of his prepared text was a carbon copy of the August 1 FOMC release.
From public remarks and past patterns, it would appear that more than half of the current FOMC members would be amenable to additional easing. But it may be important to Chairman Bernanke that any step in this direction not attract a substantial amount of dissent. The magnitude of the program and the messaging surrounding it must therefore be crafted with care.
If he wanted to win over those still undecided, though, he could do worse than laying out the case that he made this morning in Jackson Hole. An event-filled two weeks awaits before the next FOMC meeting, but it seems clear that the Chairman is leaning toward further accommodation.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.
Source: Northern Trust