Bernanke's 'Shocking' Announcement

Posted by - Friday, August 31st, 2012

This morning, Federal Reserve Chairman Ben Bernanke spoke at the annual Jackson Hole symposium, but his comments revealed little about the Fed's future plans.

Shocking. Bernanke gave another vague speech, hinting at QE3, but not officially announcing it. Did you expect otherwise?

Per usual, he didn't shut down the idea of a further round of quantitative easing, expectations for which have reached an all time high, as shown by this Bank of America chart posted by Zero Hedge:

QE3 Expectations Chart

No, he didn't disappoint these expectations... he simply dragged them out further.

From the Financial Times:

“Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodations as needed to promote a stronger economic recovery and sustained improvement in labour market conditions,” said the Fed chairman.

He engaged more directly with current Fed policy than in his 2011 speech at the Fed's annual gathering in the Wyoming mountains, but did not break new policy ground as he did in a famous speech in 2010.

This essentially fit the expectations of Bank of America that Bernanke would promise more action if the markets declined further or failed to improve and that he would stress the importance of the Fed's policy action without actually announcing anything.

But Bernanke did admit that the Fed was aware of the risks associated with more unconventional policies:

“A second potential cost of additional securities purchases is that substantial further expansions of the balance sheet could reduce public confidence in the Fed's ability to exit smoothly from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might increase the risk of a costly unanchoring of inflation expectations, leading in turn to financial and economic instability.”

Though he knows the high risks of securities purchases will cause a further decline in faith in the Fed, he believes it would be unjustified.

The risk of deferred inflation is not a reason for a lack of confidence, he says.

Bernanke spent a great deal of time highlighting the Fed's past actions, saying that QE1 and QE2 were effective. While many analysts find that laughable, the Fed has been pushed into a corner, without a lot of options as Congress has not offered much assistance in dealing with the fiscal woes debilitating to our economic growth.

He's left the floor open for the Fed's next policy meeting, which will take place on September 12 and 13.

Some suspect he did not want to reveal too much ahead of schedule, hence the lack detail and failure to publicly admit to any definitive future plans.

The markets had jumped ahead of his speech on Friday morning. The S&P 500 rose 0.8% ahead of the meeting and the Dow Jones Industrial Average was up 0.4%.

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