From Fed Chairman Ben Bernanke’s remarks to the Economic Symposium in Jackson Hole, Wyoming:
Notwithstanding some important steps forward, however, as we return once again to Jackson Hole I think we would all agree that, for much of the world, the task of economic recovery and repair remains far from complete… Central bankers alone cannot solve the world’s economic problems.
Had the chairman stopped right there, not just for dramatic pause, but for good, and dramatically stepped down from the podium, boldly walking off stage in front of his brethren from the world’s monetary policy elite, he would have qualified for a Cuban cigar, a Nobel Prize and an early all-expense-paid retirement. Not necessarily in that order, but you get the picture.
No such luck – the truth could not be told, at least not this year at the Jackson Hole confab of the global monetary policy cabal. But never one to disappoint, the chairman did open up yet another opportunity to clarify the situation when he noted:
At best, though, fiscal impetus and the inventory cycle can drive recovery only temporarily. For a sustained expansion to take hold, growth in private final demand – notably, consumer spending and business fixed investment – must ultimately take the lead. On the whole, in the United States, that critical handoff appears to be under way.
Now much of this statement strikes us as backward or just plain wrong. Of course, final demand is important, it is the actions of innovators, entrepreneurs and managers responding to either existing profit signals, or anticipated or perceived profit opportunities, that set the wheels of commerce and income-generation in motion. Without the income from the jobs created by businesses, households have nothing but past savings or credit in order to express their final demand.
But our real bone to pick with the chairman has more to do with his last sentence, about the passing of the torch. Quite simply, the torch isn’t going anywhere. Uncle Sam is still holding it and the private sector is still refusing to take it.
The torch is visibly sputtering and dimming, at least if you are paying attention to the most recent economic data flowing out of the United States. Most noticeably, the pace of advance in the monthly US private payrolls has dropped below 100,000 per month, which is about where we were in 2007, on the way into the last recession.
US growth measures are decelerating and 2011 recession probabilities are rising. Bernanke acknowledges this fact with his actions, if not with his words. In the closing paragraphs of the chairman’s Jackson Hole speech:
Notwithstanding the fact that the policy rate is near its zero lower bound, the Federal Reserve retains a number of tools and strategies for providing additional stimulus. I will focus here on three that have been part of recent staff analyses and discussion at FOMC meetings: (1) conducting additional purchases of longer-term securities, (2) modifying the Committee’s communication, and (3) reducing the interest paid on excess reserves. I will also comment on a fourth strategy, proposed by several economists – namely, that the FOMC increase its inflation goals.
These “policy measures” will be ineffective. First off, Bernanke openly admits in the Jackson Hole speech that the Fed has no idea what the correct size or timing of further quantitative easing measures might be. Not exactly confidence-building. Second, the Fed’s communication strategy is about words and shaping perceptions, which has not proven to be Chairman Bernanke’s particular forte. Third, the notion that cutting the interest rate on excess reserves from 0.25% to any figure below will create even a dimple of change in the real economy is truly beyond absurd.
The chairman has been clear that quantitative easing works primarily through its effect on interest rates and asset prices – he might as well make the manipulation explicit and get on with it. Then he might have a small chance of creating the “wealth effects” required to get private-sector economic activity back on an accelerating track. Clearly, his original action checklist leaves much to be desired.
At the same time, we must recognize US investors have probably overplayed the double-dip card, judging by various measures of investor sentiment and by various tools of technical analysis. The pop now under way in equity prices is likely to continue as investors recognize a double dip does not mean an imminent recession – it only means a deceleration in the rate of growth, which was subpar to begin with. But we would not expect the stock market’s pop to last very long. So if you have not done so already, we would use the bounce to lighten up on equity and risk asset exposures.
US economic growth is clearly decelerating, and Chairman Bernanke has very few rabbits left in his top hats. Sustainable economic growth will not begin until the chairman’s magic show ends and meaningful private- sector investment begins.
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