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August 31, 2012 at 08:18 AM
The Federal Reserve is getting ready to take more action, Chairman Ben Bernanke suggested Friday at Jackson Hole, as he pointed to the Fed’s success in using non-traditional methods to keep the struggling U.S. economy out of a double-dip recession.
In Bernanke’s speech before the Federal Reserve Bank of Kansas City Economic Symposium in Jackson Hole, Wyo., the Fed chairman outlined the challenges of using nontraditional tools such as “forward guidance” communication plus the Federal Open Market Committee’s (FOMC) quantitative easing and Operation Twist securities-buying programs.
He concluded that such nontraditional tools in a historically low-interest-rate environment had worked to bring the U.S. out of recession and that they will continue to work to keep the economy in recovery.
“It seems clear, based on this experience, that such [nontraditional] policies can be effective, and that, in their absence, the 2007-09 recession would have been deeper and the current recovery would have been slower than has actually occurred,” Bernanke said. “The Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
LPL Financial investment strategist John Canally said Bernanke spent a lot of time talking about the cost of quantitative easing, but that he also seemed very concerned about the state of the economy and that the Fed can manage the cost of a third round of quantitative easing, also known as QE3.
“It’s still a matter of when and how, not if the Fed is going to act,” Canally said an hour after Bernanke’s 10 a.m. eastern time speech. “He didn’t talk about the ‘how’ much, whether the Fed will do quantitative easing in chunks or in a more open-ended way. He sounded a little more concerned about the economy than in the past, which might tilt the Fed to Sept. 13, but I don’t think there’s any question that they’re getting ready to act.”
Stocks Sell Off but Recover Quickly
The U.S. stock markets sold off in reaction to Bernanke’s speech, which Canally characterized as “a naïve, knee-jerk reaction” to what the Fed chairman said.
“He’s never going to say, ‘Oh, we’re going to start buying bonds today.’ If anyone thought that was going to happen, they weren’t paying attention,” Canally said. “In the first five or 10 minutes after the speech there was a sharp dip in stocks, and now we’re pretty much back at the highs of the day. When people in the markets had a chance to read through the speech, they realized that more Fed action is coming, and it’s just a matter of when and how, not if.”
The U.S. stock markets were up across the board at noon. The Dow Jones industrial average was up 124 points, or 0.96%, at 13,126. The S&P 500 was up 10.50 points, or 0.75%, at 1,410. The Nasdaq index was up 20 points, or 0.66%, at 3,069.
