His speech at an annual economic conference was keenly anticipated, but, contrary to speculation, Ben Bernanke, chairman of the US Federal Reserve, did not unveil any new plan to stimulate the flagging American economy.
Speaking at a conference in Jackson Hole, Wyoming, Bernanke said he was optimistic about the medium- and long-term prospects for the US economy. He also urged the federal administration and lawmakers to improve the quality of economic policymaking and work together to promote macroeconomic and financial stability.
While stock markets around the world react to any cues from the Fed chairman, the latest speech would not impact capital inflows into emerging markets like India, according to Alberto Ades, co-head, global economics, Bank of America-Merrill Lynch. Ades pointed out inflows were strong through the US economy’s soft patch and the turmoil in the euro zone, and the high volatility and negative sentiment in recent days had not prompted any outflow.
While he does not see a continuation of inflationary trends, Ades expects another rise by the Reserve Bank of India in September, though, prospects of a further rise were uncertain.
Bernanke cautioned against disregarding the “fragility of the current economic recovery” and argued that policies which promoted a stronger recovery in the near term by putting people back to work would also serve the longer-term objectives. But, he said such policies were outside the mandate of the central bank. He also called for a sustainable path towards cutting US debt over time. Ades said Bernanke’s message to Washington was: “Our primary responsibility is to maintain low inflation, and we’re doing that. You need to maintain fiscal discipline – you’re not doing that.”
The Federal Open Market Committee’s meeting in September has been extended to two days instead of one, prompting speculation a new plan could be announced. But, any tools the Fed may employ will tend to be progressively less effective, feels Ades. “With yields already so low, will a QE3 make any significant difference?” he asks.
“I don’t expect any surprises from the Fed,” agrees Arvind Panagariya, professor of economics at New York’s Columbia University. He sees a slow recovery for the US economy, but not another recession. While he thinks India could be affected on the margins, Panagariya says the country is not doing what it can to promote domestic growth, which would offset any negative impact from the US. He argues for urgent reforms in land acquisition and the labour market to spur domestic demand and exports.
