Chairman Ben S Bernanke has big shoes to fill this week when he speaks at the Federal Reserve’s annual symposium in Jackson Hole, Wyoming: His own.
Last year, Bernanke hinted that the Fed might embark on a second round of asset purchases to bolster the recovery, kicking off a 28 per cent rally in the Standard & Poor’s 500 Index of stocks that ended in a three-year high on April 29.
Now, any boost to the economy from the Fed’s $600 billion of bond buying is hard to detect, with growth slowing to a less- than-1-per cent annual pace in the first half, the US losing its top credit rating from S&P and stocks falling about 18 per cent from their peak.
The deterioration — coupled with a government that’s cutting spending and showed itself to be “dysfunctional” ahead of the debt-ceiling expiration this month — increases the pressure on the US central bank to show it can and will help expansion, according to Neal Soss, chief economist at Credit Suisse Holdings USA Inc.
Policy makers this month pledged to keep their benchmark interest rate near zero until at least mid-2013 and also said they “discussed the range of policy tools” available, signaling they may add to their record stimulus.
Bernanke will be making “a major speech and the chairman knows the whole world is watching, so if he chooses not to say very much, the markets and the economy in some broader sense would be disappointed,” said Soss, a former economist at the Federal Reserve Bank of New York. “It’s absolutely critical that the Federal Reserve portray itself as having some relevance to the economic problems the society faces.”
RECORD LOWS
Soss predicts Bernanke will suggest that the central bank plans to lengthen the average maturity for its $2.86 trillion of assets, which would help bring down long-term interest rates. The yield on the benchmark 10-year Treasury note was 2.062 percent at 5:14 pm on August 19 in New York, according to Bloomberg Bond Trader prices. Yields have fallen to record lows since the Fed announced its rate pledge on August 9.
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Bernanke’s decision about whether to expand his unprecedented monetary easing comes as he faces the most internal opposition in his five-year tenure, and after his earlier measures sparked criticism. The latest bond-purchase program ignited the harshest political backlash against the central bank in three decades, with Republican lawmakers saying the policy risked causing a surge in inflation.
RARE DISSENT
Federal Reserve Bank presidents Charles Plosser of Philadelphia, Richard Fisher of Dallas and Narayana Kocherlakota of Minneapolis all voted against the Fed’s decision to keep the target for the federal funds rate at zero to 0.25 percent until at least mid-2013. Plosser and Fisher both said last week the pledge won’t help spur growth. The last time three policy makers dissented was in November 1992.
“Our problems are not problems easily addressed by monetary policy,” Plosser said in an Aug. 17 interview, adding that the Fed is “risking its credibility because it’s doing things that don’t work.”
It isn’t clear how much any additional actions would help, given the Fed has already exhausted many of its tools, said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. The central bank has kept the rate on overnight loans among banks near zero since December 2008. It also purchased $1.7 trillion of Treasury and mortgage debt between December 2008 and March 2010, and the $600 billion of Treasuries from November through June.
NO RABBITS
“Unfortunately, the Fed doesn’t have any rabbits to pull out of the hat to magically reignite economic growth,” Gault said. “It is doing what it can, and despite the dissent, that will probably mean a QE3 program at some point, but its prime ammunition has already been used.”
Bernanke told Congress on July 13 the Fed does have stimulus options; these include buying additional securities, increasing the average maturity of its bond portfolio, lowering the interest rate on excess reserves and pledging to keep its balance sheet near a record high for a longer period of time.
He also foreshadowed the Federal Open Market Committee’s Aug. 9 decision to hold interest rates near record lows. The S&P 500 Index (SPX) climbed 7.6 percent between Aug. 8 and Aug. 15, and has since fallen 6.7 percent amid concerns that U.S and global economic growth are faltering.
“The Fed got a pretty good response” to its decision, “so I think he’ll try to continue to play his cards in a measured fashion,” said Ward McCarthy, chief financial economist at Jefferies & Co. in New York, who also predicts the Fed will increase the average maturity of its portfolio. “We’ll see something similar to last year.”
The bond market already is pricing in an expectation that the Fed will announce new purchases of $500 billion to $600 billion, Barclays Capital analyst Anshul Pradhan said in an Aug. 12 report. Investors looking for confirmation in Bernanke’s Jackson Hole speech may be disappointed, he said.