Source 1 (Calculated Risk):
First from Jon Hilsenrath and Kristina Peterson at the WSJ: Bernanke Signals Readiness to Do More
Federal Reserve Chairman Ben Bernanke offered a robust defense of the effectiveness of the central bank's easy-money policies in his speech Friday at the Fed conference here, and left little doubt that he is looking toward doing more to give the economy a lift at the Fed's next policy meeting in September.As Hilsenrath notes, Bernanke argued: 1) QE has been effective, 2) Additional QE would be helpful, 3) the costs of additional QE "appear manageable", and 4) the economy is "far from satisfactory.
• In Bernanke's view, QE has been effective. From his speech:
How effective are balance sheet policies? After nearly four years of experience with large-scale asset purchases, a substantial body of empirical work on their effects has emerged. Generally, this research finds that the Federal Reserve's large-scale purchases have significantly lowered long-term Treasury yields. ... These effects are economically meaningful.• The costs of additional QE are "manageable":
... a study using the Board's FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred. The Bank of England has used LSAPs in a manner similar to that of the Federal Reserve, so it is of interest that researchers have found the financial and macroeconomic effects of the British programs to be qualitatively similar to those in the United States.
To be sure, these estimates of the macroeconomic effects of LSAPs should be treated with caution. ... Overall, however, a balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks.
[T]he costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.• The economy is still very weak:
[T]he economic situation is obviously far from satisfactory ... The unemployment rate remains more than 2 percentage points above what most FOMC participants see as its longer-run normal value ... Further, the rate of improvement in the labor market has been painfully slow. I have noted on other occasions that the declines in unemployment we have seen would likely continue only if economic growth picked up to a rate above its longer-term trend. In fact, growth in recent quarters has been tepid, and so, not surprisingly, we have seen no net improvement in the unemployment rate since January.Bernanke's comments suggest QE3 will be launched very soon, perhaps on September 13th following the next FOMC meeting.
Unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time.
From a research note today by Andrew Tilton at Goldman Sachs:
In the most striking line of the speech, Bernanke professed “grave concern” about the weak labor market and the potential human and economic cost of persistently high unemployment. Although consistent with prior comments about long-term unemployment and the risk of hysteresis, these are very strong words from a Fed chairman. When one has a “grave concern”, action—quite possibly aggressive action─is appropriate.And from Tim Duy at EconomistsView: Bernanke at Jackson Hole
The Chairman’s remarks strengthen our conviction that the Fed will ease in September, most likely by pushing out its guidance that rates will remain “exceptionally low at least through late 2014” to mid-2015 or beyond. We now think the probability of an announcement of further asset purchases is close to 50/50 in September, though our base-case forecast is still that this is more likely in December or early 2013. When and if asset purchases do occur, we expect them to be concentrated in agency mortgage-backed securities, and on an open-ended basis (i.e. a monthly rate of purchases) with changes in the rate of purchases conditional on the economic environment. Our views could still change depending on how economic data and financial conditions evolve between now and the September 13 announcement.
On net, Bernanke's speech leads me to believe the odds of additional easing at the next FOMC meeting are somewhat higher (and above 50%) than I had previously believed. His defense of nontraditional action to date and focus on unemployment point in that direction. This is the bandwagon the financial press will jump on. Still, the backward looking nature of the speech and the obvious concern that the Fed has limited ability to offset the factors currently holding back more rapid improvement in labor markets, however, leave me wary that Bernanke remains hesitant to take additional action at this juncture. This suggests to me that additional easing is not a no-brainer, but perhaps that is just my internal bias talking.