Some Musings From Chairman Bernanke:
“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.”-August 27, 2010 at Jackson Hole, Wyoming.
“The economic outlook remains unusually uncertain.”-July 21, 2010 in the semiannual monetary report to Congress.
Mr. Bernanke wisely decided to avoid repeating his now infamous quote, but his assurances that the Fed “will do all it can” to promote a continued recovery appears to have had a limited effect on jittery investors. Why? Because the reality is slowly dawning on market participants: monetary policy alone cannot solve all problems, which means that growth will be weak, unemployment will remain high, and the recovery, at best, will be slowly protracted over an extended period.
The one solace that investors might have taken could be at risk as well. After Mr. Bernanke announced back on March 15, 2009 (on 60 Minutes) that the Fed was indeed “electronically printing,” the dollar predictably depreciated and stocks advanced. This time around, should the Fed decide to purchase another trillion dollars or so of longer-term securities, investors might very well panic at the notion that what had already been done proved to be insufficient at that more is needed.
The whole idea of creating another trillion dollars of bank reserves might be pointless anyway since there already is about $1.2 trillion sitting at the Fed now doing nothing but collecting 0.25% (and a mountain of dust). And lest anyone think that lowering the rate paid on reserves will somehow spur bank lending, it isn’t going to happen anyway because the Fed believes that the Fed Funds market, and hence its ability to control the benchmark overnight rate, would be irreparably damaged if a zero interest rate policy on reserves was adopted.
The point here is that what good will it do for the overall economy if the Fed enlarges its mountain electronic dollars since basically all of that newly printed currency has to just sit there in isolation anyway?
Actually, the biggest fear that everyone, especially the Fed, has to have at this juncture is this: What happens if the Fed prints and the economy does not respond? Other policy measures, such as additional fiscal stimulus which involves increasing the deficit, are not likely to be available. Bernanke acknowledged in his Jackson Hole speech that the cost of borrowing is not the primary factor affecting firms’ willingness to expand and hire but rather, it is the expected aggregate demand for their product which drives those decisions.
Forcing down interest rates is apparently not spurring demand for home purchases, as potential buyers wait for prices (and rates) to decrease further. Indeed, it seems as if the Fed can’t help but avoid creating a deflationary environment (and the attendant delay of purchases) as it ramps up the printing press. The law of diminishing returns in action!
Still, traders should be aware that Mr. Bernanke conditioned the Fed’s response to a lack of employment growth “regardless of the risks of deflation.” And after this Friday’s report on Non-Farm Payrolls, which at best will only show a meager gain in private sector jobs (if not an outright loss), market participants may very well react by selling the dollar in anticipation of the inevitable response from the Federal Reserve.
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