From Goldman Sachs:
BOTTOM LINE: Bernanke offers little guidance on near-term policy outlook, but extension of September meeting makes easing at this meeting a bit more likely than before. We continue to think that further easing via manipulation of the Fed’s balance sheet —either through expansion or restructuring of the average duration of holdings—is likely by early 2012.
1. In light of the market attention preceding it, Fed Chairman Bernanke’s Jackson Hole speech was clearly anticlimactic. He decided not to explicitly discuss the prospect for asset purchases, or indeed outline easing options at all. While the speech does not change our overall view that additional monetary easing is more likely than not, it adds uncertainty about the near-term course of communication and the timing of easing steps. On the margin, it also raises the importance of the FOMC minutes released on Tuesday, and of the September FOMC meeting.
2. Bernanke’s remarks contained a short passage on the prospect for additional monetary stimulus. He reiterated that the committee “has a range of tools”, and that it discussed the costs and benefits of those options at the August FOMC meeting. He added that the September FOMC meeting has been expanded to two days to allow a fuller discussion of easing options as well as “other pertinent issues, including of course economic and financial developments”. Interestingly, past experience suggests that the probability of easing is higher at two-day FOMC meetings, all else equal.
3. Policy matters turned up in a few other places in the speech. First, Bernanke said that “Good, proactive housing policies could help” speed a recovery—potentially a signal the Fed favors administration proposals around managing GSE foreclosure inventories and/or a blanket refinancing program (see yesterday’s US Daily for details). Second, he said that the Fed “fosters macroeconomic and financial stability in its role as a financial regulator, a monitor of overall financial stability, and a liquidity provider of last resort.” This is a typical boilerplate sentence, in our view, but does remind that the Fed is attentive to financial stability concerns.
4. Bernanke was guarded on the near-term outlook for growth. While he said that the FOMC still expected growth to accelerate in the second half as temporary shocks wane, he also noted that it is “difficult to judge by how much these developments [European stress, S&P downgrade, debt ceiling discussions] have affected economic activity thus far, but there seems little doubt that they have hurt household and business confidence and that they pose ongoing risks to growth”.
5. Finally, consistent with the rest of the content at the conference, the speech contained a discussion of long-term growth issues. Our main takeaways were that he was optimistic about the long-run outlook for the US economy overall, he argued that the financial crisis did not damage longer-term growth prospects “if—and I stress if—our country takes the necessary steps to secure that outcome”, and he emphasized that fiscal sustainability must be addressed.
We all know that Bernanke will not stand and watch as markets, asset prices and confidence tanks. And we all know that no amount of quantitative easing can get America out of the troubles she is in. Those troubles are non-monetary — they are systemic and infrastructural: military overspending, political corruption, public indebtedness, withering infrastructure, oil dependence, deindustrialisation, the withered remains of multiple bubbles, bailout culture, the derivatives-industrial complex, food and fuel inflation and so forth. The real question is when will America tire of the slings and arrows of fortune? When will America take arms against her sea of troubles? And how long will she last on this mortal coil? To die? To sleep? For in that sleep of death what dreams may come…