“All we want are the facts Ma’am”. For those of you who remember Jack Webb’s character, Sgt. Joe Friday, making that statement each week on the popular series Dragnet, you might have longed for Sgt. Friday when listening to Fed Chairman Ben Bernanke’s speech on Friday at the Kansas City Fed’s Jackson Hole conclave. As an academic, he seemed to be speaking to his academic colleagues trying to write his own biography and convincing them of the merits of his Fed’s actions. He first described why the Fed’s quantitative easing (QE) policies have made sense and then confusing the issue, he went on to suggest that more of the Fed’s same policies won’t make the current situation much better. His description of how the economy was aided by prior QE action suggests that facts don’t necessarily have to get in the way of a good story.
Bernanke said, “the first two rounds of LSAPs (Large Scale Asset Purchases) may have raised the level of output (economic growth) by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.” The Fed Chair also took credit for the increase in stock prices saying, “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. This effect is potentially important because stock values affect both consumption and investment decisions.” It may be that the Fed Chairman is affected by the current political climate and so wants to take credit for the anemic economic growth we’ve seen during the last four years before a presidential candidate does so. Never mind the fact that corporations have lowered debt levels, created a hoard of cash and improved profits to record levels. Or, he’s trying to pave a path for his European counterparts who are likely to suggest sometime this month that similar QE action is warranted in Europe. Perhaps Chairman Bernanke had to leave the door open on additional bond purchases, not so much for his own central bank but for that of his counterpart, Mario Draghi the chair of the European Central Bank (ECB) who is positing the same medicine for what ails European economies. Unfortunately Mario Draghi also lacks cooperation from the fiscal policy makers that Chairman Bernanke desires here at home.
Whatever the case, Gentle Ben went on to say that while these policies have had a positive affect so far, they may not be likely to have the same affect going forward. There were several problems with this form of monetary policy. First, he discussed the market impact saying, “One possible cost of conducting additional LSAPs is that these operations could impair the functioning of securities markets.” This is not an insignificant statement. The Fed Chairman is acknowledging the impact their policies have on markets and suggest that manipulation can have a long-term negative impact on the way securities markets function. Then the Trader in Chief counters that notion of improperly functioning markets by suggesting “that the Federal Reserve could incur financial losses should interest rates rise to an unexpected extent from a purely fiscal perspective, the odds are strong that the Fed’s asset purchases will make money for the taxpayers, reducing the federal deficit and debt.” It is good to know that the Fed is comfortable using taxpayer capital to trade. After acknowledging the potential problems with grand intervention he summarizes his comfort by saying, “At the same time, the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.” And with this statement the door is open to future QE despite the concerns noted.
What we learned from the Jackson Hole speech is that the Fed believes unconventional policy can help stabilize the economy but alone it won’t achieve their goals for stable prices and full employment. They have been able to achieve low inflation (at least by the government’s own measure) but the full employment picture will remain elusive without the fiscal policy help that Chairman Bernanke mentioned during his Friday speech. Bernanke gave a shout out to his government colleagues in Congress and the Administration saying “fiscal policy at both the federal and state levels is a headwind…and the fiscal cliff and debt ceiling issues are probably restraining activity.”
Why does it all matter? Because these unconventional actions from the Fed, even when in the form of bond purchases has resulted in a weaker dollar which subsequently led to an increase in stock and commodities prices. The problem is that a weaker dollar isn’t good for the economy long-term and each subsequent form of QE has resulted in a smaller boost to asset prices (We’ve discussed this in greater detail in our second quarter 2012 market commentary here). Market participants have now lowered their expectations for Fed action with a weekend poll indicating that money managers now believe there is a 40% chance of action versus the 70% at the beginning of last week. We’ll get more information from Europe this week on the 6th and will have to see if similar intervention benefits are suggested.