Bernanke's Jackson Hole Speech

Bernanke's speech seemed mostly on target and sensible, leaning toward growth issues, given the thrust of the conference apparently, but touching on some short-run policy issues.



Of particular note is the discussion of the August FOMC policy statement.

In light of its current outlook, the Committee recently decided to provide more specific forward guidance about its expectations for the future path of the federal funds rate. In particular, in the statement following our meeting earlier this month, we indicated that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. That is, in what the Committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years.

The important message here is that the majority of the Committee is quite certain that there will be "low rates of resource utilization and a subdued outlook for inflation ..." for an extended period of time, in particular two years. That view seems hard to reconcile with some of the other parts of the speech, which seem to emphasize the uncertain state in which we are in. We can infer that this is the key element of contention on the committee. The dissenters may just be more uncertain than the majority.



Another key tidbit is this:

In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting.

This makes it sound like there are some tools in the box that we have not tried yet, and that some of these tools will actually do something. One tool that has been used, and could be used again, is quantitative easing. As I argued here, under the current circumstances more QE is futile. The only tool the Fed currently has that will do anything is the interest rate on reserves. As Bernanke told us last year, lowering that from 0.25% is not an option, so it can only go up.



In the growth discussion, there is this:

Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view--the exception to which I alluded earlier. Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow. In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment.

What is not clear from this is whether Bernanke thinks that, at this point in time, the Fed can do anything to bring about a faster recovery. Maybe (actually almost certainly) the FOMC is conflicted about this, and we'll have to wait for the next meeting to find out what they are thinking.



Finally, the federal government is told to get its act together:

Finally, and perhaps most challenging, the country would be well served by a better process for making fiscal decisions. The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses. Although details would have to be negotiated, fiscal policymakers could consider developing a more effective process that sets clear and transparent budget goals, together with budget mechanisms to establish the credibility of those goals. Of course, formal budget goals and mechanisms do not replace the need for fiscal policymakers to make the difficult choices that are needed to put the country's fiscal house in order, which means that public understanding of and support for the goals of fiscal policy are crucial.

Good. That needed to be said.