Fed Chairman Bernanke Douses Hopes For QE3
Federal Reserve Board Chairman Ben S. Bernanke abruptly ended bullish hopes for pulling a rabbit out of the hat this morning, when he proposed no new dramatic measures in a long-awaited speech at Jackson Hole, Wyoming. His address mandated that no new steps be taken at this time to counter the anemic growth now in place in the domestic economy. That tepid rate of improvement, meanwhile, was ratcheted down a notch this morning when the U.S. Commerce Department downwardly revised its estimate of second-quarter GDP from an already uninspiring 1.3% to just 1.0% for the April-through-June period.
Mr. Bernanke, meanwhile, suggested that instead of the Fed taking new novel steps to promote growth that the Congress should be out in front with possible new proposals. He indicated that the legislative branch may need to act to stimulate hiring and economic growth. That may be a stretch, of course, given the ideological deadlock between the two parties now in place in Washington. Of course, even if they did act, there is no assurance those actions would be successful.
The Fed Chairman said that he is optimistic that the job market and the economy will return to full health in the long run. Of course, he did not quantify what he meant by the long run. Mr. Bernanke's speech comes at a critical moment for the economy, with some economists worrying that another recession might be near. This morning's downwardly revised GDP growth rate of 1.0% for the second quarter does not reduce the recession risk, which we now peg at almost a 50-50 possibility.
A big reason for the recession worry is that consumer spending, the engine that primarily drives the economy, is now in low gear. Employment growth is slow, for example; the unemployment rate remains above 9%; and housing remains in an extended depression of historic proportions. Now, as if things were not bad enough, the East Coast is staring at the possibility of a direct hit from Hurricane Irene, a potentially tragic occurrence that could well cost tens of billions of dollars, or more, if the worst scenarios come to pass. An already extended budget deficit can ill afford that.
Not only do we have concerns over here, but Europe's debt crisis is unresolved, and growth concerns on the Continent are proliferating by the day. And all the while, interest rates are at historic lows and the Fed has recently indicated that this state of affairs will prevail for another two years. It is against this backdrop that many on Wall Street had hoped and expected that the Fed would do something big, or at least material. That there is little ammunition left in the bank's arsenal did not seem to dawn on some observers.
In any event, the Fed may well have done the wisest thing in not acting more aggressively. As for Wall Street's reaction, it was not encouraging at the outset, with the Dow falling just after Mr. Bernanke's Jackson Hole speech was released, by a little more than 200 points. It has since fully erased that loss and gained 10 points. Moreover, the NASDAQ has turned sharply higher, gaining 30 points, after an earlier setback of about 35 points. Maybe Wall Street is acting prudently, after all.