Federal Reserve chief Ben Bernanke’s much anticipated speech to the Kansas City Fed’s Jackson Hole conference was fairly vague about Fed’s future course—no surprise there— but was also quite frank about the fact that the economy appears more sluggish than it looked to be just a few months ago. This reality check comes on the same morning that the Commerce Department issued a downward revision to its second qurater GDP estimate, to a sluggish 1.6% rate. That’s considerably lower than its first estimate a month ago, which said that GDP grew 2.6%, but it’s also less of a downward revision than the markets had been expecting. With that less-bad-news-is good-news as a backdrop, Bernanke spoke of the Fed’s policy options in a sluggish world with low interest rates, miniscule inflation and a major headwind called Housing.
Evidently, he hit the right chords because the press and the market reacted positively. Here’s a key snippet of the speech where he speaks of possibly using “unconventional” methods to counter any sudden deterioration in the economy:
We will continue to monitor economic developments closely and to evaluate whether additional monetary easing would be beneficial. In particular, the Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly. The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do. As I will discuss next, the issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool.
When you’re the Fed chairman you clearly don’t have to say much to get people’s attention. Here’s how those comments played out in the post-speech headlines:
The Wall Street Journal’s first story notes: “Bernanke Says Fed Stands Ready”
While the Financial Times headline declares: “Fed Stands By To Boost Growth”
The New York Times says: “Bernanke Signals that Fed is Ready To Prop Up Economy”.
Even the financial markets moved higher on the speech, though there was a bit of a selloff in the first moments after the speech made the rounds, perhaps because it lacked a specific promise.
Here are some of Bernanke’s comments on the economy:
Overall, the incoming data suggest that the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat weaker than most FOMC participants projected earlier this year. Much of the unexpected slowing is attributable to the household sector, where consumer spending and the demand for housing have both grown less quickly than was anticipated. Consumer spending may continue to grow relatively slowly in the near term as households focus on repairing their balance sheets. I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace.
Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place.
The essence of those comments is that the economy is facing no immediate crisis and is recovering, albeit slowly. However if economic conditions deteriorate significantly, Bernanke notes, the Fed will act. The “unconventional” course could entail buying securities in the open market, changing the language used in the Fed’s statements, or lowering the rate that the Fed pays banks to keep their excess reserves at the Fed.
With interest rates currently so low, and the Fed’s traditional ammo so depleted, it is perhaps best to stay forcefully vague at this point. Here’s part of Bernanke’s summary:
Should further action prove necessary, policy options are available to provide additional stimulus. Any deployment of these options requires a careful comparison of benefit and cost. However, the Committee will certainly use its tools as needed to maintain price stability–avoiding excessive inflation or further disinflation–and to promote the continuation of the economic recovery.