Federal Reserve Chairman Ben Bernanke, in a speech in Boston this morning, suggested that the Fed will take further direct action to assist the ailing economy. Earlier this week, we previewed and explained the Fed's likely approach, "quantitative easing," which would consist primarily of buying up government debt securities in an effort to add cash to the economy and make borrowing cheaper. Here's what Bernanke said and what it means for the Fed's economic strategy.
- What He Said, Translated Into English The Washington Independent's Annie Lowrey translates. "As always with the Fed, the statement came in cagey, somewhat confusing language. ... In English: The Federal Reserve is concerned about the inflation, unemployment and growth problems. But it cannot lower interest rates -- its preferred tool for stoking a bit of inflation and growth in the economy -- because rates are already near zero. Therefore, it needs to perform 'quantitative easing,' essentially buying up long-term debt from big firms, thereby flushing cash into the economy."
- Trying to Bring Up Inflation The Wall Street Journal's David Wessel summarizes, "Inflation is too low and unlikely to return to the Fed's target of a bit below 2% without some help from the Fed. ... By the Fed's favorite measure, the personal consumption expenditures index excluding volatile food and energy prices, inflation has come down from 2.5% early in the recession to about 1.1% in the first eight months of the year."
- Treading Carefully in Risky 'New Territory' The New York Times' Sewell Chan writes, "Mr. Bernanke noted that 'unconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.' But he suggested that the Fed was prepared to manage the risks associated with the most powerful tool remaining in the Fed's arsenal of weapons to stimulate the economy: vast new purchases of government debt to lower long-term interest rates. As Mr. Bernanke sent an unmistakable signal to the markets that the Fed was prepared to wander into uncharted territory, he tried to anticipate and address potential criticism."
- Trying to Preempt Another Downturn The Big Picture's Peter Boockvar writes, "Bernanke in his speech on monetary policy is reiterating the recent message from himself and a majority of the Fed's belief that another round of asset purchases will likely come on Nov 3rd as the Fed won't wait for another downturn in economic activity and will instead respond to a lack of improvement. We saw this on Tuesday with the FOMC minutes from the Sept 21st meeting, we heard it last Monday when Bernanke spoke in Rhode Island and we heard it the Friday before from Dudley. The only question and what will be discussed on Nov 2nd and 3rd is how they will go about doing this in terms of pace and size."
- Implies Pessimism About Employment 24/7 Wall Street's Jon Ogg explains, "The talk of a disappointment with employment would implying that there are real concerns that the unemployment rate will remain high and decline only slowly." The Wall Street Journal's David Wessel adds, "Although the economy is better than it was, and growth in 2011 should be better still, it will be so slow the economy won't produce many more jobs than the number needed to offset the entry of new workers to the labor force, he said. ... [However,] the Fed can help bring unemployment down."