Fed Chairman Ben Bernanke delivered his much anticipated speech in Jackson Hole, Wyoming this morning. I have criticized Bernanke for his reluctance to make clear that the economy's problems must be addressed through fiscal reforms. Well, today he spoke up strongly about that. Bernanke said, "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."
Thanks, Ben, for making that clear. The market rallied in response to Bernanke's remarks, but not because he called for fiscal reforms. It rallied because, once again, the Chairman implied that more monetary stimulus could come. To critics (like me) who believe the economy's problems are not due to high interest rates, Bernanke said, "Early in my tenure as a member of the Board of Governors, I gave a speech that considered options for monetary policy when the short-term policy interest rate is close to its effective lower bound. I was reacting to common assertions at the time that monetary policymakers would be 'out of ammunition' as the federal funds rate came closer to zero. I argued that, to the contrary, policy could still be effective near the lower bound. Now, with several years of experience with nontraditional policies both in the United States and in other advanced economies, we know more about how such policies work. It seems clear, based on this experience, that such policies can be effective."
I would say such policies were not nearly as effective as changes to fiscal policies would have been, but that's beside the point. The point is that Bernanke is saying that despite near zero interest rates, he believes that even more quantitative easing will help. Does this mean he will actually do more? These two sentences from the speech answer that question. "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."
Bernanke is giving Congress cover. He says fiscal reforms are a must, but he also says more quantitative easing will help. Let there be no doubt. QE3 is on the way.
