Federal Reserve Chairman Ben Bernanke gave no hint Friday as to whether the central bank was leaning toward easing fiscal policy again in an effort to rouse the sleepy U.S. economy.
Instead, in a closely-watched speech at the Federal Reserve’s economic symposium in Jackson Hole, Wyo.,Bernanke made a point of saying monetary policy alone isn’t a cure-all for the economic ills that have plagued global markets since the credit crisis of 2008.
“Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve; in particular, it cannot neutralize the fiscal and financial risks that the country faces. It certainly cannot fine-tune economic outcomes,” Bernanke said, according to a text of his remarks released to the media.
Bernanke closed the speech using language familiar to anyone who’s been following Fed policy since the last round of fiscal stimulus was approved in November 2010: “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability,” he said.
Markets Fall then Rebound
Markets were initially disappointed by the speech but quickly recovered. The Dow Jones Industrial average was up almost 100 points at 10:30 a.m. EST.
Elsewhere in the speech, Bernanke described current economic conditions as “far from satisfactory.” He specifically cited the slowly recovering labor market as a ‘grave concern.”
Bernanke used the speech to defend the Fed’s significant role in propping up the economy since the U.S. housing bubble burst over four years ago, leading to a financial crisis that threatened global economic stability.
Since late 2008 the Fed has kept interest rates at historically low levels (a range of 0% - 0.25%), and purchased more than $2.3 trillion in U.S. securities in an effort to pump cash into the economy by boosting liquidity.
Despite the aggressive policy moves by the Fed, unemployment has remained stubbornly above 8% and the housing market has been mired in a deep slump.
Few analysts were surprised by Bernanke’s cautious tone Friday.
“I believe (Bernanke) will disappoint and rather than highlighting what can be done, will take this opportunity to preach on fiscal policy and to talk about what can’t be done with monetary policy,” Peter Tchir, of TF Market Advisors in Connecticut, said ahead of the speech.
More Stimulus Still a Possibility
Although Bernanke’s dour assessment of the U.S. economy hardly extinguished speculation that another round of bond buying could be announced at the Fed’s September meeting.
“As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years,” he said.
The economy has shown some renewed signs of life since the Fed’s last meeting earlier this month. The July jobs data was marginally better than the four previous monthly labor reports. And recent data on retail sales, exports and housing have also shown improment. Data on consumer spending for July released Thursday was the strongest in five months.
While most economists believe the Fed’s aggressive strategies since 2008 have helped pull the U.S. back from the financial abyss, there is a strenuous debate over whether another round of fiscal easing can actually spur economic growth. That debate is especially strong among some regional Federal Reserve Board members, several of whom have publicly said the Fed should refrain from any more stimulus programs because of the risk of higher inflation.
With that in mind, one school of thought holds that, rather than announcing more quantitative easing at its September meeting, the Fed will simply promise to extend low interest rates until well into 2015. That way the Fed is doing something without really having to do anything.
The Fed has already vowed to keep interest rates at nearly zero until the end of 2014.