Photo: The Federal Reserve
Bernanke says the Fed has a “range of tools” for stimulating growth, but he does not plan on using them soon.The Dow was off up to 1.8% before rallying into the green.
Bernanke says the Fed has limited ability to ensure long-run growth and that this responsibility falls to Washington.
He adds that the controversy over the debt ceiling hurt markets.
Finally, and perhaps most challenging, the country would be well-served by a better process for making fiscal decisions. The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses. Although details would have to be negotiated, fiscal policymakers could consider developing a more effective process that sets clear and transparent budget goals, together with budget mechanisms to establish the credibility of those goals. Of course, formal budget goals and mechanisms do not replace the need for fiscal policymakers to make the difficult choices that are needed to put the country’s fiscal house in order, which means that public understanding of and support for the goals of fiscal policy are crucial.
As a justification for no QE, Bernanke gives a positive outlook for the economy in the U.S. and Europe.
There have been some positive developments over the past few years, particularly when considered in the light of economic prospects as viewed at the depth of the crisis. Overall, the global economy has seen significant growth, led by the emerging-market economies. In the United States, a cyclical recovery, though a modest one by historical standards, is in its ninth quarter. In the financial sphere, the U.S. banking system is generally much healthier now, with banks holding substantially more capital. Credit availability from banks has improved, though it remains tight in categories–such as small business lending–in which the balance sheets of potential borrowers remain impaired. Companies with access to the public bond markets have had no difficulty obtaining credit on favourable terms. Importantly, structural reform is moving forward in the financial sector, with ambitious domestic and international efforts underway to enhance the capital and liquidity of banks, especially the most systemically important banks; to improve risk management and transparency; to strengthen market infrastructure; and to introduce a more systemic, or macroprudential, approach to financial regulation and supervision.
He says he expects Europe to make the right moves to get through the debt crisis.
Read the full speech here.
Preview: At last year’s Jackson Hole conference, Ben Bernanke suggested the coming of QE2 and set off a rally that lasted through summer 2011. Now markets would love it if he steps in again.
At this point, however, most pundits have low expectations for the speech.
The Fed can’t cut interest rates much more. It could embark on some form of quantitative easing — from QE3 to Operation Twist to a return of QE1 — but faces political pressure regarding anything that would increase inflation or be seen as monetizing the debt.
Jon Hilsenrath among others have asked the Fed to use this moment to shift attention back to fiscal policy.
NOTE: Bernanke can’t actually announce policy here because it’s not an FOMC meeting.
While Bernanke may not suggest QE today, Nouriel Roubini says a move is inevitable later this year.
The ECB’s Jean Claude Trichet will also speak. Neither will be televised.