Bernanke Speech Focuses on Jobs; Suggests More QE is Coming

As expected, Fed Chairman Ben Bernanke’s much anticipated speech entitled "Monetary Policy Since the Crisis" at the Kansas City Fed's annual economic symposium in Jackson Hole, moved the markets on Friday morning.

The key question for traders coming into Friday was whether or not Mr. Bernanke would (a) announce or (b) provide hints that more monetary stimulation (aka QE – quantitative easing) is forthcoming. But while traders wanted certainty, they only received what we will interpret as more dovish comments from the Fed Chairman.

Unlike emotional traders and their uber-sensitive HFT algorithms, objective Fed-watchers did not expect Bernanke to tip his hand in front of the upcoming September FOMC meeting.

The Fed Chairman has made it very clear in recent statements that the Fed stands ready to do what is necessary to help the job market, within the confines of the central bank’s dual mandate, of course. In English, this means that as long as inflation remains low and in check, the Fed is free to take action to try and help the economy. And given Mr. Bernanke’s words this morning, this is exactly what we should expect the Fed to do in the coming months.

So, will the Fed do more QE? See for yourself – Below is an excerpt from Bernanke’s speech:

“The unemployment rate remains more than 2 percentage points above what most FOMC participants see as its longer-run normal value… The stagnation of the labor market in particular is a grave concern 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 for many years”

In this particular section of the speech, Bernanke chose very strong words to describe the state of the jobs market. The words “enormous suffering and waste of human talent” could even be considered a rather emotional proclamation from a central banker.

Bernanke went on to say, “Taking due account of the uncertainties and limits of its policy tools, 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.”

This particular paragraph caused the WSJ’s Jon Hislenrath to expect the Fed to do more. The following tweet was from DJFX Trader, “Bernanke's focus on labor market stagnation critical given #Fed's dual mandate; a reason to step on gas.” Again in English, Hilsenrath expects the Fed to take action again soon in order to get the economy moving.

Thus, the question now for the markets to try and answer is not “if” the Fed will provide additional stimulation, but when. As of the beginning of the week, 45% of economists surveyed said they expected the Fed to launch another round of QE (this time targeting the mortgage backed securities market) at the September meeting.

The markets have fretted that with the most recent economic data not as bad as it had been earlier in the summer, the Fed may decide to wait before taking further action. In fact, several FOMC members have recently expressed their reservations about the Fed taking more stimulative action at this time.

Mr. Bernanke addressed such reservations in his speech by acknowledging that monetary policy can only do so much. Bernanke said, “Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve; in particular, it cannot neutralize the fiscal and financial risks that the country faces. It certainly cannot fine-tune economic outcomes.”

In addition, Fed Chairman Bernanke spent a good deal of time in the speech discussing the unconventional measures the Fed has implemented in response to the financial crisis. While he noted some of the uncertainty in measuring the costs and benefits of such policies and said that there is higher hurdle for nontraditional policies, he also talked up their broader effectiveness and argued that the Fed should not rule out further use of such policies if economic conditions warrant.

Bernanke also emphasized the Fed's frustration with labor market trends and reiterated his view that the damage has been largely cyclical in nature (as opposed to structural).

Bernanke appeared to close the speech by reiterating the central bank's current bias toward an easy monetary policy. He said that although the Fed has acted aggressively to support economic growth and boost the jobs market, it is important to achieve additional progress in terms of unemployment. He then once again reiterated that the Fed will provide additional accommodation as needed.

While Chairman Bernanke appears to be doing a fine job of arbitrating the debate in public, the bottom line – at least from our perch – is that Ben Bernanke appears to be set to, as Mr. Hilsenrath said, put his foot on the gas. As we see it, the only question is when and how hard.

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