March 4, 2021

Markets Will Look for Hints in Bernanke’s Words

It was just a year ago, after all, that the economy was in almost exactly the same position: pitifully slow job and output growth, fears about another financial shock from Europe’s debt crisis, warnings of a double-dip recession. And a year ago, at this same conference, the chairman, Ben S. Bernanke, pointedly described all the weapons the Fed had available to rescue the economy — you know, just in case.

Several months later, the Fed opened its arsenal and began a major asset-purchasing program intended to stimulate growth.

Given Congress’s unwillingness to engage in more fiscal stimulus — in fact, it plans to pull back on spending — analysts and investors are wondering whether history will repeat itself, especially if the economy deteriorates further. Stock markets have been rallying this week, partly on hopes that Mr. Bernanke may signal more monetary stimulus is on the way, or at least under what conditions more stimulus would be likely. Broad stock indexes gained 3 percent or more on Tuesday, with the Dow industrial average pushing back above 11,000.

Among the options Mr. Bernanke is expected to lay out on Friday would be engaging in another round of major asset purchases, known as quantitative easing, which is meant to lower long-term interest rates; lowering the interest rate the Federal Reserve pays banks on their reserves; and extending the maturity structure of the Fed’s current portfolio of Treasuries, which analysts expect to be the most likely course of action. All these potential strategies would be intended to encourage more lending, among other goals, and thereby increase growth. The Fed might also raise its medium-term target for inflation, which would discourage banks, businesses and consumers from sitting on their cash, and so induce them to spend more.

But beyond such potential options, the announcement of a clear monetary policy road map seems unlikely. Fed speeches are constructed to cause minimal market excitement — either good or bad — and there are reasons to think Mr. Bernanke’s speech may be especially noncommittal.

First, only two weeks ago the board’s Federal Open Market Committee, which sets benchmarks on interest rates, severely dimmed its economic forecasts and took the unusual step of pledging to keep short-term interest rates near zero through at least mid-2013. It seems unlikely that the Fed would make major news so soon after that announcement, economists say.

“I don’t think the picture has changed all that much from two weeks ago,” said Paul Dales, senior United States economist at Capital Economics. “Suggesting more is in the pipeline already would smack of panic.”

Moreover, Mr. Bernanke could not unilaterally make a major policy change; he would need to seek approval from other Fed officials. Such consensus has become more challenging, since the composition of voting members on the Federal Open Market Committee has changed since last year.

Last year there was one steady dissenter, the Federal Reserve Bank of Kansas City president, Thomas M. Hoenig. Mr. Hoenig consistently voted against keeping short-term interest rates near zero for so long, and voted against the second round of quantitative easing begun by the Fed last November.

The voting members of the committee rotate each year, and now there is not one but three strongly hawkish voices: Narayana Kocherlakota, Charles I. Plosser and Richard W. Fisher, who are the presidents of the Federal Reserve Banks of Minneapolis, Philadelphia and Dallas, respectively. These three voted against the Aug. 9 announcement keeping short-term interest rates low through mid-2013, and so seem unlikely to endorse further easing measures.

There is also mounting political pressure from outside the Fed — on Capitol Hill and the presidential campaign trail — against expanding the central bank’s balance sheet.

Another reason Mr. Bernanke may be especially reluctant to signal commitment to further monetary stimulus is that inflation has picked up. Monetary stimulus, after all, generally increases inflation since it pumps more money into the economy and chases prices higher.

Last year, when economists gathered at Jackson Hole, the most recent consumer price index report had shown prices to have risen over the previous year by 1.2 percent. With inflation so low — and below the Fed’s target rate of inflation — many economists worried that the country could descend into a deflationary spiral akin to the one seen during the Great Depression, and more recently in Japan. With the threat of deflation, another round of quantitative easing seemed prudent, or at least less risky.

Today, though, consumer prices are 3.6 percent higher than a year ago, softening the case for further monetary stimulus. The Fed has a dual mandate, maximum employment and stable prices; even if Fed policy makers believe further easing might help employment, they may be reluctant to compromise the other half of their mandate.

The final reason Mr. Bernanke may be reluctant to go further is that it is not clear how powerful more monetary stimulus would be. And it is not just anti-Fed types like the presidential candidate Rick Perry who doubt the usefulness of more easing; Ph.D. economists are skeptical too.

“At this point you’re really pushing on a string,” said Nigel Gault, chief United States economist at IHS Global Insight.

Economists are still debating the effectiveness of the quantitative easing program begun last November, raising questions about the potency of yet more asset purchases.

Quantitative easing is supposed to help lending (and thereby growth) by pushing down long-term interest rates, which are already quite low. It is not clear that lowering them further would do much to encourage lending, especially since many companies do not see a need to borrow primarily because demand is so weak, and not because credit is expensive.

The other way that quantitative easing is intended to help spur growth is by encouraging investment in riskier assets, like stocks, because the return is so low on long-term Treasuries. If investors flee to these assets — as they did last year, following the Jackson Hole speech — that could raise the price of these assets, causing consumers to feel richer and so more comfortable with spending.

Commodity prices are higher today than they were a year ago, though, and policy makers may worry about pushing them even further up. If energy and food prices rise again, that would actually discourage consumers from spending.

For these reasons, many economists say they believe that, should the Fed engage in more stimulus, it will be unlikely to select quantitative easing as its weapon. But the other options, too, present their own hurdles, and many are still untested.

In the end, economists say, any additional Fed action may depend on what seems most politically palatable, even though the central bank is officially an independent entity. And that logic seems to point to changing the maturity of the assets on the Fed’s balance sheet.

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