With the Grand Tetons in the background, Federal Reserve Chairman Ben Bernanke, right, with Jean-Claude Trichet, former president of the European Central Bank, in Jackson Hole, Wyo., last year.
By Paul Davidson, USA TODAY
Published: 8/31/2012 10:06:07 AM
At a highly anticipated speech in Jackson Hole, Wyo., Friday, Federal Reserve Chairman Ben Bernanke called the sluggish pace of job growth a "grave concern," reiterating in prepared remarks that the Fed is prepared to do more to stimulate stronger growth.
In a speech set to be given at 8 a.m. MT, Bernanke may have disappointed Wall Street's hopes in giving no clear signal that the Fed will take action at its mid-September meeting.
"The stagnation of the labor market in particular is a grave concern," he said at the Kansas City Fed's annual symposium that attracts an elite group of global central bankers and prominent economists.
Bernanke said "it is important to achieve further progress, particularly in the labor market," adding that "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."
That language echoes the Fed's statement after its early August policy making meeting and reflects a stronger inclination than it had conveyed in previous statements to take action if the economy doesn't pick up noticeably.
Many economists believe the Fed likely will decide to buy more Treasury or mortgage-backed securities, possibly at its Sept. 12-13 meeting, to lower long-term interest rates and spark more economic activity. Alternatively, it could promise to keep short-term interest rates near zero longer.
Yet while Bernanke left the door open to such action soon, he stopped short of providing an emphatic signal that many investors and Fed watchers were seeking.
At a meeting in Jackson Hole two years ago, Bernanke strongly hinted the Fed was poised to buy more Treasury bonds, a strategy that lowered rates well before the Fed actually voted two months later to purchase $600 billion in Treasuries.
A similar foreshadowing this year seemed possible. At its meeting early this month, many Fed policymakers determined that additional stimulus would be needed unless economic data "pointed to a substantial and sustainable strengthening in the pace of economic recovery," according to minutes of the meeting.
While growth remains subpar three years into the economicy recovery, the latest round of ecnomic reports have been mixed. In July, employers added a better-than-expected 163,000 jobs, consumer spending picked up and pending home sales climbed to the highest level in two years.
At the same time, manufacturing activity has weakened recently, consumer confidence in August fell to its lowest level in 10 months and second-quarter economic growth was revised up slightly last week to a still-tepid 1.7% annual rate.
In his speech, Bernanke called job growth "painfully slow." He said obstacles to a stronger recovery include a weak housing market despite recent signs of life, the European financial crisis, tight credit standards and looming federal tax increases and spending cuts in January that could push the U.S. back into recession if a divided Congress can't agree on how to mitigate their impact.
Nigel Gault, chief U.S. economist of IHS Global Insight, says the recent modest uptick in economic activity isn't enough to head off another round of Fed stimulus.
"It's hard to argue that the evidence of the last month or two constitutes a substantial and sustainable improvement," Gault says.
Still, he says, the cloudy economic picture suggests that Fed policymakers will look closely at upcoming data, likely avoiding a commitment to additional action in September until they see more recent data, particularly the government's employment report for August, which is due out Sept. 7. The European Central Bank also could take additional steps at a Sept. 6 meeting to ease Europe's debt crisis.
Further supporting a wait-and-see approach is that the benefits of more government bond purchases are likely to be small, Gault says. Many Fed watchers expect policymakers to buy mortgage-backed securities, rather than Treasuries, to more sharply push down mortgage rates and help jump-start the housing market. Mortgage rates are already near historic lows, but many consumers can't qualify for home loans because their existing houses are worth less than what they owe.
A third round of stimulus would likely invite criticism from Republicans that the Fed's actions risk eventual inflation, a charge that could be particularly controversial less than 100 days before this fall's presidential election.
The Fed could take the more modest step of suggesting it will keep short-term interest rates near zero until at least 2015, placing further downward pressure on interest rates, says Jason Schenker, president of Prestige Economics. The Fed has said it expects to keep rates very low until at least late 2014.
Economists say each round of Fed stimulus has had less impact than the previous one.
Since the 2008 financial crisis, the Fed has purchased more than $2 trillion in Treasuries, mortgage-backed securities and other debt in an unprecedented effort to lower long-term rates and coax investors to shift assets to stocks, boosting markets. It decided in early 2009 to buy $1.7 trillion in Treasury and mortgage bonds, followed by the $600 billion in Treasury purchases in 2010.
Under a program begun last September — and extended in June through 2012 — the Fed plans to buy $667 billion of short-term Treasuries and use the proceeds to buy longer-term Treasuries. By reducing the supply of long-term Treasuries in the market, the Fed hopes to exert downward pressure on long-term interest rates.
