BERNANKE: WE STILL HAVE TOOLS THAT CAN HELP THE ECONOMY
Ben Bernanke sent one clear message this morning in his speech at Jackson Hole – he believes they still have the tools that can help the economy. He said:
“In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.”
There’s just not much juice in the speech aside from this one paragraph. It’s mostly macro thoughts with a focus on trends the Fed can’t really impact. In fact, Bernanke says monetary policy is unlikely to impact these long-term trends much at all:
“most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.”
The bottom line appears to be this – Ben Bernanke is going to continue his usual MO of being REACTIVE to economic data and will act if and only if the economy appears to weaken between now and the September FOMC meeting. For the economy, this likely doesn’t mean much. As I’ve stated before, there just isn’t that much the Fed can do at this point without stepping on some political toes. And the options he does have just won’t do that much for the broader economy. For the markets the message is equally clear. If you don’t start crying a bit more loudly, the Fed isn’t going to stick that pacifier in your mouth any time soon.
And for the second time immediately after his speech, mini crash, then a huge intra day rally……
bernanke also announced that those “short term” emergency rate cuts that occurred a couple years ago, will now go beyond 2013 and now will remain indefinitely.
more taxation through inflation, while the government services it debt.
What happended after the intra day rally, I don’t get why markets react positively to this.
sometimes fund or pension money thats waiting to be invested simply waits until after a big event or announcement before entering the market, it seems.
“sometimes fund or pension money thats waiting to be invested simply waits until after a big event or announcement before entering the market, it seems.”
That’s a good point. All I can say for sure is that I have noticed this trend specifically after the last big three announcements. The debt ceiling, Ben’s last address, and now this one.
Now that I have noticed this I’m sure I will be able to totally capitalize on it when he speaks next in September…I mean, if it happened three times! Just kidding.
or….. Hurricane going up the east coast has everybody scrambling to get home early. Think “pre” holiday trade.
Hi Cullen and others-
You may have addressed this before, but I’m curious. What is keeping mortgage rates (30-yr fixed) from dropping to 3.5% or less? I’ve always thought this would be an incentive to help find a housing floor more quickly, and I’ve been mystified as to why this has not happened yet?
Bernanke stated, “Notably, the housing sector has been a significan driver to recovery from most recessions in the United States since World War II…”
My thoughts are two-fold, decrease mortgage rates to help establish a floor sooner, and I’m also thinking that there needs to be a shift towards home buying (via greater home owner incentives- and not just a one time rebate) to minimize the rental mentality. Given that housing prices will remain depressed or even further eroded is keeping plenty of peopele out of the home-owner market.
Just wanted to get feedback from people. Thank you!
My only concern with housing based programs is that the problem is relatively simple. In many areas of the country, housing is just so far out of line with incomes that prices need to adjust further downward before creating a sustainable floor. So we can implement all of these programs that bolster the market, but the real problem is a larger more structural imbalance. The market needs to adjust lower. Had we been less wasteful in 2009/10 I think we’d be closer to that point already…..
TPC, I thought that in a few of your other comments, you had indicated that the housing price decline had now pretty much run its course, and it might be a good time to buy now (this was more in the context of a primary residence than investment). Do you still stand by that or have you changed your mind?
Depends on where you live. But yes, I do not see HUGE downside at the national level. Maybe 5-10% more and a long stagnation. I need to get that housing update out soon….None of this changes my opinion that the price declines need to occur in most markets and that govt intervention cannot prevent it.
more government subsidizing of housing? lower mortgage rates? this has what keeps housing prices artificially high. i wouldn’t want to buy a house 30% overvalued simply because of a lower interest rate.
how about letting the market go through its cycles, so price will become in line with incomes, rather government making the cycles even more volatile.
one of these days the government ought to legislate a program to benefit savers, rather than debtors.
Dave and Cullen-
Thanks for the discussion. I see what you both are saying, and I agree. I was thinking of it in terms of independent geographical real estate markets, where the market price would be established by incentivized buyers (I’m assuming that there is an abundance of supply); people who can buy based on income and would be encouraged to do so with lower borrowing rates and would set the new market bottom for homes. I am viewing the real estate market as an auction market, but different from an equity market. Stock values can be derived from various analytical studies like DCF and P/E, but home values are based on regional supply and demand (regional comparables, etc.). I agree with the idea that the asset is out of line with the income levels, but I would point out that the benchmark for that asset (home) valuation is relative and can shift to a new higher level if demand is there (assuming income is not the issue).
Lastly- I threw out incentives as a targeted Fed program (I’m not saying that the Fed do this). If my understanding of MMT is correct, then shouldn’t we be encouraging spending, either through reduction of taxes, which drain liquidity from the system, or other incentives to spend?
Again, thanks for the discussion- it helps to have you all as a sounding board!
Granted this is a bit of speculation, but it is interesting to note that the ultimate solution to the USA last two big debt issues was solved through exchange rate adjustments.
FDR: Revaluation of the dollar against gold
Nixon: Moving to a floating exchange rate (closing the gold window).
Also there is a interesting quote in Bernanke 2002 Fed Deflation Speech
Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today [2002], it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation.
I know some people argue that QE2 was geared to intentionally devalue the USD. However, an even more interesting point is that given the Fed’s monetary actions have been benign to date and fiscal policy is far too political to implement, that exchange rate solution (whatever form it may take) is a possibility they are considering.
Another Bernanke quote from 2002.
“Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.”
I’m not sure what “private assets” he is referring to though purchase of mortgage secruities falls under this.
i would think the market would tank towards the end of the day – the hurricane may decimate NYC and while that is a local issue, i still can’t see traders holding onto their longs, especially after a nice run up today. thoughts?
I think this is the appropriate Thread to post my comments.
We have a couple of ideas we are researching. In light of now announcment and tools at his disposal.(I can’t help but think of Ben walking into a bank with a trench coat and handing the teller a note..”give me all your money I have a number of weapons under my coat that could kill you”. Now if I’m the teller I’d bet my life that Mr. Bernanke has nothing under his coat but a make shift bomb that if he pushes the button he kills himself and sends his partner Mr. Economy back into a upstate Jail they call Recession not faster but longer/deeper.)
That being said…We can’t help but notice the following.
Agricultural price compared to the SPX. There is NO other time where the PPI and ascent of world food prices at these levels has not put us into a recession.NONE..so my call today is and it’s not a surprise. WE ARE HEADED FOR A RECESSION. I have more data to support this. But what I was given today…it’s enough to make the call by itself. Additionally we are now looking into the following ETNs and ETFs.
Anything Commodity related.
Wheat, Corn, Surgar, Beef, Etc.
We do not have this in our portfolios and the rally we feel is just beginning.Like wise I would understand someone commenting here that ag. prices to the SPX are at a 15 year high. I would respond not with words buy my actions. We have a number of graphs and data to support this. Thus we are a little late but it’s hight time to increase this portion of our portfolios now. If Ben thinks the federal reserve is his hedge fund to manipulate asset prices than go at it ben…you will only enrich my clients further.
B Ferro- What if any thoughts or recomendations do you have here?
Again..we are just going through a number of ETNs/ETFs now. We are at step 2 of this process. Step one.. was the analysis and confrimation this is a secular bull market just beginning.
Are you bullish or bearish on commodities?
Ocean- I guess I wasn’t clear.
We are Bullish on Agriculture-FOOD, FOOD, FOOD.
Things like Timber-not yet…But I will just focus on FOOD. Grains, Wheet, Proteins, Rice etc.
WE Think the Bull Market is about to go. We are Bullish!
I’ll leave out other aspects of commodities. Are focus is Food. I have not sorted this call out yet with actionable pieces and %. But that is what staff is doing as I type. I will go back and read GMOs piec on this to see what I may be missing or to assist me. As well as some other things.
Sorry for the confusion.
We are in a Bear market…the SPX is in our view going to have a tough tough time after this next rally fails…we have 1270(but will sell above 1250) With in this bear market we have identified Ag. Food as an area which is STARTING a secular Bull market. Now we have to drill into the details of the tools to use.
I don’t have anything on this yet. I’m posting this to leverage many of the TPC braintrust. See who picks up my comments and adds some needed direction or color.
@VII
I think your FOOD, FOOD, FOOD trade is a good one. I have been long CF Industries for a while. I can provide additional research if need be, but in short, the World needs food and this is one industry that has not been destroyed by the imports. Made in the USA!
VII — I am always interested in your analysis of the markets and find your work a valuable addition to my thinking. I’ve also been looking at ag-food for the past couple of months. With the drought problems in Texas, farmers in Georgia unable to get crops in due to a new draconian anti-immigrant law, and other indications, those companies that can bring in the goods should do quite well. There is a Canadian resource company (Sprott) that has some unique assets in a large farming operation. I’m hoping they turn out to be a winner.
Hi John
Thanks…..tomorrow I’ll look into sprout.
Water is a big one also. I’ve done some research here.But I have nothing actionable yet.
I really appreciate you taking the time to help me.
It’s sunday…just put my son to sleep…thinking bout the upcoming week…hope you have a good one.
“Sprott” http://www.sprott.com/Splash.aspx hope that helps.
VII-
Now that I am officially one of your biggest fans, had to see if you are thinking the along the same lines- Berananke’s really naked under that trench he is wearing, but with the “flash” of his teeth and some “cooing” he’s able to placate his little baby (borrowing from one of my favorite Cullen analogies), and so we’re seeing a quick drop in volatility and a correlated market movement upward. I’m thinking that this can continue on through next week with VIX coming below 30 to about 25 and a corresponding increase in market prices. Ofcourse this will play out if Europe doesn’t do anything to increase volatility next week (a small, but still likely chance of that). I’m afraid we’ll see some strong buy signals, and so I’m thinking of selling into this rally to gear up for some buys later on. Currently, we do not have a buy signal for Ags, but I like what you are thinking.
An engine is a tool to get cars places. But if the car is stuck in the mud it doesn’t matter if you turn on the engine or not. The car won’t go anywhere but it will waste a lot of gasoline.
This is a great analogy to the US economy. No amount of spending and financial trickery will help unless US knows where it is going.
Is this really different from what Japan experienced, though? There may be more going on than anyone understands – and that especially applies to Bernanke and Krugman. They might be CAUSING what they so want to avoid.
In particular, one side believes in the ECONOMIC CONFIDENCE FAIRY (the republicans and spending cutters) and the other side believes in the INFLATION EXPECTATIONS FAIRY (Bernanke and Krugman).
So basically, we need a FAIRY to spur this economy? UNREAL.
http://www.kansascityfed.org/publications/research/escp/escp-2011.cfm
Sounds to me that Benny (Bernanke) is scared to death. And I know that Bernanke is the fall guy for the misguided tenure of Greenspan.
Cullen -
Love your website. Per El Viejo’s link, have you seen the conference paper at Jackson Hole, “The real effects of debt”?
I am depressed after reading it, its such a waste of time for a group of brilliant economists who could be curing cancer or doing some other advanced research.
The paper aggregates public and private debt, does not differentiate between differing monetary systems by comparing EU countries with the US, UK, and Japan. The conclusion is typical debt hysteria calling for dramatic reductions in government debt while at the same time clamoring for more private saving. Its unbelievable how stock-flow inconsistent this research signed off by the Federal Reserve is, one can only hope the “Masters of the Universe” Bernanke and Trichet are at some cocktail hour than listening to this paper.
Let me know what you think of it?
Rob,
Thanks for passing that along. I hadn’t seen it. The Reinhart & Rogoff paper that has become so famous in recent years (and influenced public policy massively) includes many of the same mistakes. You’re right – it’s unfortunate that so many brilliant people have been clouded by a misguided theoretical framework.
Key point is Bernanke does not believe QE will do any harm. So either it works or it does not work is besides the point.
With regard to the big time economists, I like Mark Twain saying, “History may repeat but it surely rhymes”. They say the same thing with new names. Ignore them and watch the numbers.
Check out Bruce Krasting’s take on the speech. I don’t need to say what I thought about it because Bruce pretty much said *exactly* the same thing and I mean *exactly*. It’s a bit disturbing :-p
Behind the scenes right now it’s all about Europe, and QE3 is coming in September (not now).
http://www.zerohedge.com/contributed/my-read-speech
Bernanke is a theoretician and academic who is using the world’s largest economy as his lab rat. His themeless experiments and obsessive tinkering have negative repercussions throughout the USA and the world. He was appointed by George W. Bush (actually, Karl Rove) because of his easy money reputation and political pliability, and reappointed by Obama for the same reasons. Easy money as a goal in itself, bank worship and academic naivete about the real world of money and business are a recipe for a failed tenure as Fed Chairman. His record so far is terrible.
I think Benanke is waiting for a real scare in the USA markets. One that will change opinion pools. Currently the polls are saying no to more stimulus. But scare the heck out of people and they will do anything. He may be waiting for those with 401k’s to get their statements with big losses. Just my two cents.