Bernanke's message to Main Street
Federal Reserve Chairman Ben S. Bernanke tried to walk a fine line in his speech Friday: He insisted that the central bank doesn’t believe the economy will fall into another recession, but he sought to assure America that the Fed will react quickly if a downturn seems more likely.
With short-term interest rates already near zero, Bernanke indicated that the Fed could do more to ease credit conditions elsewhere in the financial system -- mainly, by trying to pull longer-term interest rates lower.
But of course, even longer-term rates already are very low by historical standards. The average 30-year mortgage rate is at 4.36%, the cheapest in at least a generation.
Here’s a sampling of Wall Street economists’ reactions to Bernanke’s speech:
Goldman Sachs economists: In his discussion of the economy’s performance over the last year, [Bernanke] does recognize that recovery is “incomplete,” that unemployment is unacceptably high while inflation is lower than the FOMC [the Fed’s policymaking committee] would like to see in the longer term, and that growth in real GDP will depend more on private final demand as inventory and fiscal stimuli are fading out. . . . But the overall sense of this part of the speech is that these factors will keep growth slow for a while, and he asserts that conditions for a pickup in growth next year “remain in place.”
Ethan Harris, Bank of America Merrill Lynch: Bernanke made it clear that, at this point in the recovery, these additional easing policies are not warranted. Indeed, he argued that despite weaker data recently, “the preconditions for a pickup in growth in 2011 appear to remain in place.” This suggests that although the Fed likely downgraded their near-term outlook on the economy, they still have faith in the recovery.
While we believe that Bernanke thinks the recovery is set to continue, we judge it likely that he does see greater downside risks. In fact, he mentioned concern about the weakness in the labor market and high duration of unemployment. However, since Bernanke was not ready, at this forum, to signal a move toward an easing bias, he had to deliver the message of faith in the economic outlook. If the data continues to weaken, particularly the labor market, we believe Bernanke will pull the trigger for easier policy.
Zach Pandl, Nomura Securities: Markets were looking for reassurance from Bernanke today, and the Fed chairman did not disappoint. His speech strengthens our conviction that the FOMC is likely to ease policy further in the relatively near future. Most importantly, he made a clear call to action to other members of the FOMC: "This list of concerns makes clear that a return to strong and stable economic growth will require appropriate and effective responses from economic policymakers across a wide spectrum, as well as from leaders in the private sector."
Finally, Chairman Bernanke put a bit of pressure on Congress and the Obama administration, saying "Central bankers alone cannot solve the world's economic problems." We think this raises the probability that the Bush tax cuts are fully extended.
Chris Rupkey, Bank of Tokyo-Mitsubishi: The Fed chairman had to be careful not to feed the market’s double-dip worries. As you recall, the Fed’s forward-looking guidance on the economy after the August 10 meeting said that the pace of economic recovery is likely to be more modest in the near term which led stocks to fall 265 points the next day.
Fed officials continue to struggle with their communications. They don’t want to be mindless cheerleaders for the economy perhaps, but at the same time, calling them as you see them carries its own risks as what you say can negatively impact business and consumer confidence. If there is a disconnect in the communications between the market and Fed officials it is the outlook for the economy. When the Fed says growth is weaker than expected they mean their own expectations for 3% to 3.5% real GDP this year. They are certainly going to revise this lower. Weaker than expected to the market means a double-dip is coming, and what action are you going to take?
Robert Brusca, Fact & Opinion Economics: Imagine a real doctor saying this to you: Well, your leg is injured and it is healing slowly -- more slowly than we had expected. But it is healing and we expect it to continue to heal. However, if it does not heal you could be at risk and we might have to amputate. Now, of course, that would be bad and we do not expect to do that but in the case that we do amputate it would be a good thing because we only do it to save your life and shield you from the spread of something like gangrene that is life threatening. So in that case it would be good and desirable and it is an option. Does that reassure you?
-- Tom Petruno
Photo: Fed Chairman Ben S. Bernanke at an annual bankers' conference in Jackson Hole, Wyo. on Friday. Credit: Reed Saxon / Associated Press