If there is more stimulus planned, Federal Reserve Chairman Ben Bernanke declined to hint at it directly Friday in his speech at the annual economic symposium in Jackson Hole, Wyo.
He did, predictably, leave the door open.
Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
The Fed chairman also, once again, called on Congress to please not further wreck the economy.
There had been speculation that some hints on the third round of quantitative easing, or QE3, could be dropped at this speech as it happened in 2010.
Haters better recognize
Bernanke's 2012 Jackson Hole speech did give a thorough accounting of the central bank's actions since the beginning of the financial crisis and their impact. He acknowledged that it's impossible to quantify how bad things could have been without action from the Federal Reserve. But still, he says, it could have been a lot worse.
Why asset purchases work
The two-and-a-half quantitative easing measures instituted by the Fed, QEs 1 and 2 and Operation Twist, worked because the purchases made by the central bank pushed prices of those assets up and yields down. The large-scale purchases also pushed investors into other asset classes, which then had the same effect of increasing prices and decreasing yields.
Declining yields and rising asset prices ease overall financial conditions and stimulate economic activity through channels similar to those for conventional monetary policy.
Low investor expectations also work in favor of monetary policy.
Large-scale asset purchases can influence financial conditions and the broader economy through other channels as well. For instance, they can signal that the central bank intends to pursue a persistently more accommodative policy stance than previously thought, thereby lowering investors' expectations for the future path of the federal funds rate and putting additional downward pressure on long-term interest rates.
But how effective were they?
The bond-buying programs engaged in by the Fed have significantly lowered long-term Treasury yields, Bernanke says.
For example, studies have found that the $1.7 trillion in purchases of Treasury and agency securities under the first large-scale asset purchases, or LSAP, program reduced the yield on 10-year Treasury securities by between 40 and 110 basis points.
The $600 billion in Treasury purchases under the second LSAP program has been credited with lowering 10-year yields by an additional 15 to 45 basis points. Three studies considering the cumulative influence of all the Federal Reserve's asset purchases, including those made under the maturity extension program, or MEP, found total effects between 80 and 120 basis points on the 10-year Treasury yield.
The asset purchase programs also pushed down yields on corporate bonds and mortgage-backed securities, or MBS. The first purchase program, in particular, has been linked to substantial reductions in MBS yields and retail mortgage rates. (Large-scale asset purchases) also appear to have boosted stock prices, presumably both by lowering discount rates and by improving the economic outlook; it is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC's decision to greatly expand securities purchases.
All of those declining yields have hurt savers but the economy is better off as a result, according to calculations by the Fed.
For example, 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.
Why isn't the economy better if Fed tools have worked?
Bernanke covered other policy tools, including communications that have indicated short-term rates will stay low until 2014. He also outlined the "headwinds" holding the economy back.
Fiscal policy and housing were among the top contenders, not long-term structural changes. Which is good because that could mean that the economy is fundamentally broken. Instead, there are things holding it back, he thinks.
I see growth being held back currently by a number of headwinds. First, although the housing sector has shown signs of improvement, housing activity remains at low levels and is contributing much less to the recovery than would normally be expected at this stage of the cycle.
Second, fiscal policy, at both the federal and state and local levels, has become an important headwind for the pace of economic growth. Notwithstanding some recent improvement in tax revenues, state and local governments still face tight budget situations and continue to cut real spending and employment. Real purchases are also declining at the federal level. Uncertainties about fiscal policy, notably about the resolution of the so-called fiscal cliff and the lifting of the debt ceiling, are probably also restraining activity, although the magnitudes of these effects are hard to judge. It is critical that fiscal policymakers put in place a credible plan that sets the federal budget on a sustainable trajectory in the medium and longer runs. However, policymakers should take care to avoid a sharp near-term fiscal contraction that could endanger the recovery.
Finally, he pointed at the stresses in credit and financial markets, mostly as a result of the sovereign debt crisis in Europe.
Given the hostility directed at rationality by the political classes, it's unlikely that Congress will take his words to heart. But the monetary policy group at the Federal Reserve will meet in mid-September to review economic conditions and decide if they need to pull the trigger on more stimulus.
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