Bernanke Indicates Federal Reserve Open to More Easing

Federal Reserve Chairman Ben Bernanke indicated that the Federal Reserve is open to additional easing in a speech given today in Jackson Hole. In his speech Chairman Bernanke outlined his stance on two issues, the economy as well as the effectiveness of monetary easing. Key takeaways from his remarks follow.

The Economy:

• Chairman Bernanke described the current economic situation as “far from satisfactory,” indicating that the recent improvement in economic data is not sufficient to indicate a true recovery.
• The labor market weakness is particularly concerning “not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last years.”
• Bernanke also noted, importantly, that he believes that the current weakness in the labor market is due to cyclical problems not structural issues. This is important because the Federal Reserve is equipped to assist with cyclical problems, but cannot address structural employment issues.
• Bernanke also noted that inflation risks will remain subdued, remaining near 2% “despite repeated warnings that excessive policy accommodation would ignite inflation.”

The Effectiveness of Monetary Easing:

• Bernanke defended the efficacy of monetary easing commenting “A balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks.”
• Bernanke also noted that the costs of such easing has not impaired the functioning of markets in which the Fed participates such as mortgage securities and treasuries. Furthermore, there has been no spike in inflationary expectations following easing.
• "The costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out further use of such policies if economic conditions warrant."

What does Mean?

Chairman Bernanke’s statements indicate that the Federal Reserve has not ruled out additional monetary easing. The economy is not performing at levels that the Fed sees as healthy, particularly the job market. Furthermore, as the weakness in the labor market is cyclical, not structural, the Fed believes that it can help improve the situation. Finally, Bernanke indicated that he sees monetary easing as effective, with manageable risks. Unless next Friday’s jobs report comes in very strong, additional easing of monetary policy, possibly in the form of QE3, is very likely at its September 12 and 13 FOMC meeting.

See Chairman Bernanke's Speech.