To some extent, the market received some answers, as Federal Reserve Chairman Ben Bernanke left the door wide open for more stimulus. He indicated that the U.S. labor had not been growing, and it was a “grave concern” for the central bank.
Bernanke then went on to say that the central bank would “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.”
What Bernanke’s speech lacked were specifics. While he did confirm more stimulus measures, Bernanke did not say what kind of easing program the central bank will implement.
The dollar’s reaction to the Jackson Hole symposium was two-fold. At first, the dollar surged as the market thought that the case for further stimulus was weak. However, after thoroughly digesting the speech, the market realized that Bernanke had actually made a strong case for more easing and promptly sold the dollar.
Bernanke believes that easing has been beneficial to the economy. He said that it has helped increase liquidity, lower interest rates, and support the stock market. According to the Fed‘s research, the easier financial conditions have created more than two million jobs and have increased economic output by around 3%.
But, as in the past, the prospect of further quantitative easing has drawn a lot of skepticism.
For one, there are those who say that the economy should have grown more after years of easy monetary policy. Remember that the Fed has cut interest rates to almost zero and has bought more than 2 trillion USD worth of long-term bonds since the 2008 financial crisis.
There are also those who argue that further easing won’t really solve the economy’s problems. Economic gurus say that consumers won’t spend despite low interest rates because they are crippled with high debt.
In addition, President of the Federal Reserve Bank of Richmond Jeffrey Lacker said that there is very little that monetary policy can do to address the main issue in the labor market. It’s not capital that is holding hiring back but rather employers are simply not finding properly-skilled workers that they need.
The argument that the economy is not in such a dire shape that would call for another dose of quantitative easing has also been presented. After all, we’ve seen a handful of positive economic data since the Fed’s last meeting in late July. The most recent retail sales, trade, consumer confidence, and housing reports all support this statement.
If you ask me, although Big Ben seems to be a fanboy of QE3, he understands that further easing is not without its costs. And so, I think that the Fed will avoid it as much as they economy can.
A lot of market junkies also share this view and they have pared back their expectations for the Fed to announce QE3 in its upcoming meeting in September 12-13.
Others though, are still waiting for the NFP report to be released this coming Friday. After all, Bernanke’s emphasis on the labor market has made it obvious that the central bank is pretty concerned about jobs. It would only make sense to keep tabs on the report.