Ben Bernanke, Chairman of the Federal Reserve, will deliver his annual address in Jackson Hole, Wyoming today. ChrossTalk breaks down the speech with our predictions of what Bernanke will discuss and our analysis of the Fed’s policy options moving forward.
Chip Lebovitz: The life of Ben Bernanke is unenviable. Rick Perry lobbed an allegation of treason at Bernanke last week, the economy has worsened over the last year, and the nation is looking to him to jumpstart the economy.
The problem is there is only so much that the Fed can do to boost the economy at the moment. Mohammed El-Erian CIO of Pimco is right to wonder about a quantitative easing three’s “questionable benefits.” Inflation has been higher throughout the past year, a full 180 from the deflation threat facing the Fed at last year’s Jackson Hole conference. Because there was a threat of deflation, supporting an inflation-increasing move like quantitative easing two (QE2) was easily approved. With inflation beginning to return to normal over the past year, it’s hard to see the Fed undertaking another quantitative easing not only due to opposition by inflation hawks but also because of a stark reality: while stimulus is needed, the Fed is not necessarily the right provider at the moment.
The best thing that Bernanke could do today is not a single policy decision, but to emphasize the economy’s problems extend beyond what the Fed could do. Unless the Fed wants to enact a portfolio of completely unprecedented policies – Brent Budowsky of the Hill presents an interesting idea, rebooting the economy will require not only stimulus from the Federal Reserve, but also a broad sweeping compromise by Congress and the president. Similar to what El-Erian suggests, Bernanke can reframe the debate; individual actors or organizations will not be able to solve our deficit and unemployment problem. The nation requires both the Federal Reserve and government working in concert to target the weakest areas of the economy.
Working to reduce household debt would be a start. Mortgage refinancing akin to the trial balloon floated through the New York Times yesterday would be a good launching point. Unorthodox Fed policy, like Budowsky’s idea, combined with other government policy like Jared Bernstein’s FAST plan is the quickest way out of this economic downturn.
Ross Freiman-Mendel: Bernanke has a few options in his speech today; he can explain the rationale of the Zero Interest Rate Policy (ZIRP) through 2013, implement some contemporary form of the Kennedy era Operation Twist, or announce Quantitative Easing 3. He will make two announcements:
First: the Chairman will set the stage for Quantitative Easing 3 (QE3). He can’t formally make the announcement, because the effects of ZIRP and QE2 on inflation and growth have yet to materialize. Mired in an unprecedented amount of dissent, the Chairman doesn’t want to look reckless. However, some, including Goldman Sachs, see QE3 as an option to boost GDP. By suggesting that the Fed will either expand or alter their balance sheets, Bernanke sets the stage for more asset purchases without mentioning specific policy.
Even Bernanke will concede that monetary policy needs a breather.
Second: If engineered correctly, fiscal policy can provide short-term stimulus to the economy. The efficacy of tax and deregulatory policy coupled with long-term deficit reduction can alter economic conditions. From his bully pulpit flanked by the magnificent Grand Tetons, Bernanke will command the same attention from the financial world that the president does when he speaks. “Monetary policy is an important tool, it is a valuable tool, but it is not an exclusive tool. It does not solve all problems,” said President of the Federal Bank of Kansas City, Thomas Hoening, “Whether it has a long-term beneficial effect is of greater debate. I’m not sure more short-run fixes are necessarily good for the economy.” Hoening has hit the nail on the head. In a recent interview, Hoening explains that the bullets of conventional monetary policy have been exhausted, our currency has been debased too much, and the US ought to shift its focus to fiscal policy, whose dangers are more imminent and consequential. Bernanke has been inhibited by the government’s poor approach to fiscal policy; it would be wise to intimate that politicians have made the Chairman’s job significantly harder. Will the President and Congress heed his advice?
Jeremy Lerman: Investors and policy wonks around the world are salivating in anticipation of Bernanke’s speech in Jackson Hole today. Anyone expecting a message that marks a shift in Fed Policy will be disappointed. Anything revealed during this speech – barring any hints of QE3, which is unlikely – will be less important than the Fed’s promise on August 9th that it would continue to keep interest rates low through 2013. In the free market, low rates signal high savings, but America has a negative savings rate and is the world’s largest debtor. So why are interest rates near zero percent?
What we need are higher rates. They are not politically attractive, but they are required for recovery. Rates have been too low for too long, fueling a misallocation of resources, labor, capital; and creating the biggest credit bubble this country has ever seen. Since the bubble burst with the financial collapse of 2008 coupled with the sharp downturn in the housing market, the Fed has aided the government in trying to re-inflate that bubble. Those policies have created a temporary floor for falling prices and even a short-term boom in stock prices, but in doing so have perpetuated our bad habits.
What the Fed ought to do is let us take our medicine, raise the rates to levels determined by the market rather than by arbitrary dictate, letting the market self-correct. This would mean less spending, less consumption and a significant contraction of the U.S. economy in the near term. But this would also yield more savings, which is the key to long-term growth. Keeping rates low only compounds and draws out the problem by encouraging us to spend more borrowed money and by punishing savings.
There is no indication that the Fed will do this even now that its policies have clearly made the problem worse. I suspect it will continue its easy money policy and continue to debase the dollar. What is at stake is nothing less than the dollar’s preservation as the world’s reserve currency. The recent rush to gold is a signal that the rest of the public is starting to wise up regarding the dollar’s instability. Even central banks are beginning to buy up gold. The next real threat will be when China and Japan decide not to finance our debt, which will lead to a major inflationary event, much worse than what we got in the 70’s.
Photo Credit: Forbes
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