When the Federal Reserve chairman speaks at an annual gathering in Jackson Hole, Wyo., this Friday, markets will be searching for something, anything, that indicates whether more stimulus is on the way.
It was just a year ago, after all, that the economy was in almost exactly the same position: pitifully slow job and output growth, fears about another financial shock from Europe’s debt crisis, warnings of a double-dip recession. And a year ago, at this same conference, the chairman, Ben S. Bernanke, pointedly described all the weapons the Fed had available to rescue the economy — you know, just in case.
Several months later, the Fed opened its arsenal and began a major asset-purchasing program intended to stimulate growth.
Given Congress’s unwillingness to engage in more fiscal stimulus — in fact, it plans to pull back on spending — analysts and investors are wondering whether history will repeat itself, especially if the economy deteriorates further. Stock markets have been rallying this week, partly on hopes that Mr. Bernanke may signal more monetary stimulus is on the way, or at least under what conditions more stimulus would be likely. Broad stock indexes gained 3 percent or more on Tuesday, with the Dow industrial average pushing back above 11,000.
Among the options Mr. Bernanke is expected to lay out on Friday would be engaging in another round of major asset purchases, known as quantitative easing, which is meant to lower long-term interest rates; lowering the interest rate the Federal Reserve pays banks on their reserves; and extending the maturity structure of the Fed’s current portfolio of Treasuries, which analysts expect to be the most likely course of action. All these potential strategies would be intended to encourage more lending, among other goals, and thereby increase growth. The Fed might also raise its medium-term target for inflation, which would discourage banks, businesses and consumers from sitting on their cash, and so induce them to spend more.
But beyond such potential options, the announcement of a clear monetary policy road map seems unlikely. Fed speeches are constructed to cause minimal market excitement — either good or bad — and there are reasons to think Mr. Bernanke’s speech may be especially noncommittal.
First, only two weeks ago the board’s Federal Open Market Committee, which sets benchmarks on interest rates, severely dimmed its economic forecasts and took the unusual step of pledging to keep short-term interest rates near zero through at least mid-2013. It seems unlikely that the Fed would make major news so soon after that announcement, economists say.
“I don’t think the picture has changed all that much from two weeks ago,” said Paul Dales, senior United States economist at Capital Economics. “Suggesting more is in the pipeline already would smack of panic.”
Moreover, Mr. Bernanke could not unilaterally make a major policy change; he would need to seek approval from other Fed officials. Such consensus has become more challenging, since the composition of voting members on the Federal Open Market Committee has changed since last year.
Last year there was one steady dissenter, the Federal Reserve Bank of Kansas City president, Thomas M. Hoenig. Mr. Hoenig consistently voted against keeping short-term interest rates near zero for so long, and voted against the second round of quantitative easing begun by the Fed last November.
The voting members of the committee rotate each year, and now there is not one but three strongly hawkish voices: Narayana Kocherlakota, Charles I. Plosser and Richard W. Fisher, who are the presidents of the Federal Reserve Banks of Minneapolis, Philadelphia and Dallas, respectively. These three voted against the Aug. 9 announcement keeping short-term interest rates low through mid-2013, and so seem unlikely to endorse further easing measures.
There is also mounting political pressure from outside the Fed — on Capitol Hill and the presidential campaign trail — against expanding the central bank’s balance sheet.
Another reason Mr. Bernanke may be especially reluctant to signal commitment to further monetary stimulus is that inflation has picked up. Monetary stimulus, after all, generally increases inflation since it pumps more money into the economy and chases prices higher.
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