Friday, August 26, 2011

Brief Summary of Bernanke's Speech

From Econoday:
Fed Chairman Ben Bernanke reaffirmed the Fed's commitment to at least two more years of low policy rates. He did not elaborate on any likely new quantitative easing but he did announce that the upcoming FOMC meeting has been expanded from one day to two days to allow for more in-depth discussion about monetary policy. The Fed chief calls on more effective fiscal policy. He sees the need for a more sustainable fiscal path. Bernanke states that the debt ceiling squabble and credit downgrade hurt consumer and business confidence. He also sees the need for effective tax, trade, and regulatory policies. On the news, equities declined further. More detail coming.

Looking at details of the speech, the Fed chairman actually does a little cheerleading, taking the role of a long-term optimist.

"As I will discuss, 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. In the interim, however, the challenges for U.S. economic policymakers are twofold: first, to help our economy further recover from the crisis and the ensuing recession, and second, to do so in a way that will allow the economy to realize its longer-term growth potential. Economic policies should be evaluated in light of both of those objectives."

But, Bernanke also plays the role of realist, noting disappointing strength in the recovery. Importantly, he still sees a modest rebound in growth in the second half of this year.

Overall, Bernanke's remarks were very close to expectations by most analysts. The Fed chairman realizes that with three dissenting votes at the last FOMC meeting, he must act collegially and make sure there is a consensus for further action by the Fed. He also may be providing some cover for Congress to enact more stimulus measures. Markets will be focusing on the outcome of the September 20-21 FOMC meeting and the outcome of the super-committee to determine the details of deficit reduction in the debt ceiling legislation recently enacted.