Once again, the Jackson Hole Symposium proved to be a major market-mover as Fed President Ben Bernanke remained coy about the central bank’s prospects of more quantitative easing. The annual economic forum was highly anticipated as the market players were eager to know whether or not Bernanke would hint at more stimulus measures, similar to what he did at last year’s meet-and-greet.
What he said
More optimistic, but still realistic! In not so many words, that sums up the Fed’s current stance on the economy. Surprisingly enough, Ben Bernanke sounded quite hopeful for the U.S. recovery, saying it should pick up its pace in the second half of 2011.
Overall, he believes that the long-term scenario hasn’t changed much for the U.S. According to Bernanke, no matter how cruddy things have become over the past four years, things haven’t gotten bad enough to permanently change the long-term growth fundamentals of the U.S. He even went so far as saying that he has become more optimistic for the economy’s long-term growth outlook.
Crazy as that sounds, Ben and his men haven’t completely lost touch with reality. He remains realistic and knows full well that the U.S. faces considerable headwinds in the nearer future. He acknowledged the persistent weakness in the housing market and the volatility in financial markets, and how they continue to threaten the economy’s recovery. He added that the Federal Open Market Committee (FOMC) has slashed its medium-term growth forecasts, but kept mum about actual figures.
One need only look at Q2 2011’s GDP report to see that a downgrade in growth forecasts is called for. The economy only expanded at an annual rate of 1.0% last quarter, much lower than the 1.3% that analysts had earlier estimated.
What he didn’t say
Just as important as what Ben Bernanke said is what he didn’t say. Though he didn’t signal QE3 as some had anticipated, he also didn’t actually rule it out.
As Pip Diddy has said, some take this as the Fed’s way of buying time until the next FOMC meeting in September, or perhaps in November when it holds its next press conference. Many take this as a sign that the Fed is leaving the door open for further easing down the road.
Fed ready to act
The bottom line is that the Fed is ready to act on any given day. Bernanke pointed out that they still have some monetary policy tools in their arsenal and that they are prepared to do whatever it takes to boost employment and economic growth.
Even though the Fed has already implemented two rounds of easing and pushed interest rates close to zero, they still have the option to lower their interest rate on their reserves or pull the trigger on QE3. However, implementing these options could make it tricky for the central bank to stick to it price stability mandate.
Aside from that, the Fed could also be contemplating even more out-of-the-box measures, such as Operation Twist which involves raising short-term interest rates and lowering long-term yields. Now that sounds really complicated if you ask me!
With very limited options left, Bernanke reminded people that the central bank can’t do the job of reviving the U.S. economy all on its own. For one, Congress must be able to come up with a plan to trim the government deficit without hurting growth and making things even more difficult for the Fed. After all, there are still some policy options outside the scope of the central bank, such as fiscal tools involving taxation and controlling government spending.
Immediately after Bernanke failed to mention any more QE measures, we saw the dollar go on a major rally. EUR/USD and GBP/USD dropped more than 100 pips in a span of an hour, while USD/CHF rose nearly 200 pips!
However, by the end of the day, the dollar had erased ALL its gains, with EUR/USD zooming higher by 150 pips to test the 1.4500 handle, while GBP/USD managed to close at 1.6349, after testing as low as 1.6209! It turns out that traders realized that Bernanke didn’t exactly shut the door on QE3, but merely postponed the decision.