For half a second I felt like I was being too hard on Ben Bernanke and his Jackson Hole speech. Mr. Market certainly thinks it presages another round of quantitative easing, with stocks up big today. And it’s considerate Fed-speak to merely hint and nod at a policy change before embarking on it, probably at the September 13 meeting.
But all of that went away when Joe Weisenthal got to the heart of his disappointment in the speech, and really in Bernanke’s tenure as well as the whole of the economic policy apparatus. To the extent that something will get done, it will be at the margins, and really the same exact margins that has led to unresponsive and inadequate monetary policy for years now. They’ve missed their inflation and employment targets, and blaming the lack of fiscal accommodation from the federal government, while true, only gets you so far when assessing Ben Bernanke’s jobs.
Indeed there are other “unconventional unconventional” monetary policies that Bernanke could be pursuing, but none of those ideas made an appearance in his remarks today. Morgan Stanley’s Vincent Reinhart gives just one example:
The main possibility for surprise is if he addresses the ongoing work within the Fed on conditional policy rules. The last set of minutes referred several times to discussions of rules and more open-end policy commitments. Up to now, the Fed has been using its policy instruments in an unconditional way, in that it announces a program of fixed duration and fixed amount. Most academic work, as will be discussed in the formal program at Jackson Hole, suggests that a rule linking the policy instrument to economic outcomes or the outlook performs better. The idea is that the Fed could agree, for instance, to keep the funds rate target at zero as long as they have an economic forecast that is short of their mission.
And there are other ideas in this space as well. But crucially, it appears from Bernanke’s actions that going out on a limb with some operation beyond QE would necessitate him essentially acknowledging that past actions failed. And he spent an entire speech today defending past actions.
Weisenthal puts it best here:
But from a bigger picture, the general tendency of political and financial leaders has been to: Do what it takes to stave off economic tail risk (collapse) but not take the steps that would actually accommodate robust growth or end the crisis.
In Europe especially, there’s a lot of going 90% of the way there, but not doing the actual difficult thing that would turn the corner, which is why the crisis goes on and on and on. There’s no total collapse. Just ongoing misery.
In the US, we haven’t had a double dip, but very few folks are thrilled with the economy.
So that’s basically Bernanke’s speech. Yes, he does enough. He provides a ‘put’ that makes markets feel good the bottom won’t foll out. But there’s nothing very exciting.
Just enough is not good enough. Especially because the status quo ante has seen a shrinking of the Fed’s balance sheet, mainly through attrition. So a QE program of asset purchases would recapture some of that, but would not even reach the full potential it will claim.
The problem is that pretty much every economic policymaker sees it as their job to avoid total collapse, while ignoring the massive waste of human capital that comes with a slow-growth status quo. This ship sailed a long time ago, but it doesn’t get any less frustrating.