Bernanke speech may offer clues to next step
By MARTIN CRUTSINGER AP Economics Writer August 31, 2012 5:08PM
Federal Reserve Chairman Ben Bernanke, left, and Stanley Fischer, right, Governor of the Bank of Israel, walk together outside of the Jackson Hole Economic Symposium, Friday, Aug. 31, 2012, at Grand Teton National Park near Jackson Hole, Wyo. (AP Photo/Ted S. Warren)
Updated: October 2, 2012 6:09AM
WASHINGTON — Few expect Chairman Ben Bernanke to signal at a Federal Reserve conference Friday in Jackson Hole, Wyo., that the Fed is about to take major new action to boost the economy. No one is sure, though.
Three years after the end of the Great Recession, the U.S. economy is still struggling to break out of a slog that’s kept unemployment at a painfully high 8.3 percent.
After its last policy meeting, the Fed repeated a pledge to try to boost growth if hiring remains weak. And minutes of that meeting showed that some Fed officials felt the economy would need more support “fairly soon “unless it improved significantly.
Still, many analysts think slightly brighter economic news since then has diminished the need for the Fed to act soon. Bernanke may want to review the U.S. jobs report for August, due on Sept. 7, and perhaps other forthcoming economic reports, before seeking any policy changes.
In the meantime, investors will still be primed for any hint in Bernanke’s speech Friday that Fed action might be coming soon. Among the possibilities:
The most dramatic tool the Fed has left in its arsenal would be another round of bond buying, to try to lower long-term interest rates. This is known as quantitative easing, or QE. In two rounds of QE, the Fed has bought more than $2 trillion of Treasury bonds and mortgage-backed securities. Its second round of purchases ended in June 2011.
Those purchases were followed in September by a program called “Operation Twist.” Under this program, the Fed has been selling short-term Treasurys and buying longer-term Treasurys. Like QE, Twist aims to encourage borrowing and spending by reducing long-term rates.
There’s a difference, though: QE expands the Fed’s investment portfolio — a portfolio that stands at $2.9 trillion and will eventually have to be reduced significantly. Operation Twist does not expand the Fed’s portfolio; it just reorders it.
Many analysts think a third round of bond purchases — QEIII, in short hand — would include both Treasurys and mortgage-backed securities. Some Fed officials have also argued that if the Fed does launch a new bond buying program, it shouldn’t set a target amount as in the past. Rather, it could keep a new program open-ended so it could continue to buy bonds until it saw significant economic improvement.
The Fed has kept its benchmark interest rate at a record low since December 2008. And for more than two years, it pledged to keep rates at exceptionally low levels for “an extended period.” Then, a year ago, the Fed put a date on that plan: It said it expected to keep rates at record lows through at least mid-2013. In January, it pushed the target date to at least late 2014.
The Fed could try, by extending that timetable even beyond late 2014, to encourage investors to keep rates low. The minutes of the Fed’s last policy meeting said many officials favored extending the date but chose to delay any change until at least the September meeting. By then, Fed officials will have been able to review their updated economic forecasts.
Many analysts think a timetable change is likely in September given the level of support for the move within the Fed.
The Fed has discussed the possibility of trimming the scant 0.25 percent interest it pays banks on their excess reserves. The idea would be that if banks earned less interest, or none, on this money, they’d be more inclined to step up lending and boost the economy.
But the minutes of the last meeting indicated that only “a couple” of Fed officials favored this move.
Others expressed concern that trimming this small interest payment could disrupt the operation of money market funds.
— OTHER OPTIONS
One other possibility that appears under discussion would be linking the Fed’s decisions on any rate increases not to a specific date but to the economy’s health.
Charles Evans, head of the Federal Reserve Bank of Chicago, has said the Fed should consider pledging to keep rates at record lows until the unemployment rate drops to 7 percent. And the minutes of the last meeting indicated that Fed officials are pondering whether to drop any timetable and instead link any rate change to the economy’s performance.
Other Fed officials oppose this idea. They say it could raise the likelihood of higher inflation later.
— NO HINTS
Many analysts say that on Friday, Bernanke may merely review the economy’s performance to date and repeat his pledge that the Fed is ready to act if growth doesn’t improve. He might repeat the options available, without any hints of what the Fed might do in September.
Those who think Bernanke will take such an approach argue that the Fed remains divided and that Bernanke doesn’t want to be seen as dictating a choice before the policy committee meets in September.
Analysts differ on whether the Fed will act before the November election, given its long-held preference for keeping a low profile close to presidential elections.
“The Fed doesn’t like to move right before an election because they get accused of being partisan and favoring one candidate over the other,” said David Wyss, a former Fed economist and now a professor at Brown University.
But David Jones, who has written four books on the Fed, said he expects some form of Fed action in September.
“Bernanke has already given us his criteria,” Jones said. “”If economic growth remains so slow that he can’t count on an improvement in labor market conditions in a sustainable way, then he will push for more Fed support.”