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Bernanke: optimism amid trials

By Sheyna Steiner · Bankrate.com
Friday, August 26, 2011
Posted: 12 pm ET

In a highly anticipated speech today in Jackson Hole, Wyo., Federal Reserve Chairman Ben Bernanke outlined the prospects for the economy in coming months and offered some perspective on long-term growth.

Most saliently there was no mention of more quantitative easing from the central bank. After last year's Jackson Hole speech in which the plans for QE2 were discussed, there was much speculation about a repeat performance in today's speech.

Bernanke declined to tip his hand to that degree and instead indicated that all options for further stimulus were on the table and being carefully considered.

"The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability," Bernanke said in the speech.

Housing and unemployment will continue to be sticking points in the economic recovery but the housing sector will eventually stabilize "if for no other reason than that ongoing population growth and household formation will ultimately demand it."

But unemployment is another matter altogether, and Bernanke indicated that there is only so much the Federal Reserve can do to decrease the unemployment numbers.

"The Fed can't create jobs, and that is really the hub on the wheel. Until we see a notable pick up in job growth, consumers and businesses are going to remain understandably hesitant," says Bankrate's senior financial analyst Greg McBride.

Instead of looking to the Federal Reserve to solve the unemployment issue, the solution should come from sound fiscal policy as established by Congress.

"The Fed does not determine how much we spend nor do they determine tax revenue, so they do not really have any influence on the debt and the deficit. Toward the end of his speech, Bernanke did say that if there is any threat to real long-term economic growth in the economy, it is the fiscal imbalance that we're currently facing," says Jerry Lynch interim dean and professor of economics at Purdue University's Krannert School of Management.

"He does go on to chastise the Congress for the fact that the process this summer was disruptive to financial markets and maybe set us back on the road to economic recovery by a couple of months," he says.

From the speech:

"… The two goals of achieving fiscal sustainability -- which is the result of responsible policies set in place for the longer term -- and avoiding the creation of fiscal headwinds for the current recovery are not incompatible. Acting now to put in place a credible plan for reducing future deficits over the longer term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives.

"Fiscal policymakers can also promote stronger economic performance through the design of tax policies and spending programs. To the fullest extent possible, our nation's tax and spending policies should increase incentives to work and to save, encourage investments in the skills of our workforce, stimulate private capital formation, promote research and development, and provide necessary public infrastructure. We cannot expect our economy to grow its way out of our fiscal imbalances, but a more productive economy will ease the tradeoffs that we face.

"Finally, and perhaps most challenging, the country would be well served by a better process for making fiscal decisions. The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses."

The Fed chairman did offer one new piece of information during today's speech and that was the unsurprising revelation that the Federal Reserve has "marked down its outlook for the likely pace of growth over coming quarters."

Today, the gross domestic product for the second quarter of the year was revised down from 1.3 percent to 1 percent. However, today's speech indicated that Bernanke believes that growth will strengthen over the second half the year.

He could be thinking of a bump in spending during the holidays, posits Daniel Penrod, senior industry analyst at the California and Nevada Credit Union Leagues.

"We tend to see a bit of a back to school bump in the end of August and September time frame. But because information lags, we won't really know the true impact until closer to the fourth quarter, and, of course, then we have the holiday season and shopping season so we typically get a little bit of assistance at the end of the year," he says.

Overall, the tone of the speech was a clear departure from that of the meeting on Aug. 9, in which the Fed chairman pledged to keep interest rates extremely low until mid-2013.

"Although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years. It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals," Bernanke said.

"Bernanke basically gave an economic pep talk without making any promises," McBride says.

"The Fed is in many ways the economic cheerleader. Everybody looks to what the Fed says and does to get a read on where things are headed," he says.

But the speech wasn't just about encouraging the lagging economy at half-time. Bernanke did indicate that problems plaguing the economy are cyclical rather than structural in nature.

"The reason that is key is that with cyclical issues in the economy the issues go away and the positives come back as things start to build. If it's structural, that means that we're looking at a complete overhaul of the system," Penrod says.

"With it being cyclical there is the idea that once things improve a lot of those skills that are sitting idle in terms of unemployment will be able to be put back into the workforce again. That is a very critical piece for those that are reading that nuance going forward. That we are still OK, our workforce is viable and we just need to get the growth back in the system to provide the jobs for these skill sets," he says.

So, the sky isn't falling. However, to give further thought to the issue, the Fed chairman did announce that the September meeting of the Federal Open Market Committee will now be two days rather than one day as originally scheduled. That will take place on Sept. 20 and 21.

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