Deconstructing Bernanke’s speech

by Jérémie Cohen-Setton on 30th August 2010

What’s at stake: In his eagerly anticipated speech to the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming, Chairman Bernanke presented an assessment of recent economic developments, the outlook, and policy implications. In doing so, he sought to recalibrate how some markets/analysts interpreted recent Fed communications, and to convey the ability of Fed policy to minimize the risk of deflation, inflation and a double dip.

The Economist’s Free Exchange blog argues that Bernanke cleared up a lot of the confusion with his long speech. In a nutshell, Mr Bernanke said the economy has, indeed, underperformed, but it will get better. And if it doesn’t, the Fed will do more unconventional things. Though puzzled that consumption has been so weak, Mr Bernanke notes several developments that bode well for a pickup: the household saving rate was recently revised up to 6% from 4%, suggesting households have made brisk progress in deleveraging, setting the stage for more robust consumption (if only employment and incomes can pick up). Second, financial markets are loosening up; especially since European policy makers got their sovereign debt crisis under control. Fed officials gathered under a hail of criticism for communicating badly. The accusations are off base. The Fed doesn’t have a communications problem, it has a policy problem. The recovery has stumbled and the central bank isn't sure why. Having long ago used up its conventional monetary ammunition, it’s not sure how effective more unconventional ammunition will be.

Catherine Rampell notes that although Bernanke assured markets that the central bank has this tool kit ready if need be, he was vague about what would be the catalyst for its use: “At this juncture, the committee has not agreed on specific criteria or triggers for further action.”

John Taylor writes that the main thing he took away from Ben Bernanke’s opener (the tradition going back to Paul Volcker and Alan Greenspan is for the Fed chair to lead off) was his call for a “cost-benefit” approach to determine whether another dose of unorthodox large scale asset purchases is needed. This is a big improvement over a “whatever it takes” approach, and it opens the door to a transparent discussion of the costs and benefits of such policies.

David Beckworth of macro and other musings argues that what Bernanke delivered was a big tease: he acknowledges three points made by advocates of more monetary easing, but then either ignores the implications of these points or argues against them. In a similar tone, Mark Thoma writes that the Fed’s wait and see policy is a mistake. It’s time for the Fed to stop playing catch-up as it waits and sees that its forecasts were wrong, and take the steps needed to boost the economy.

Paul Krugman notes that Bernanke argued that 2011 will be better, because … well, it was hard to see exactly why. He offered no major drivers of growth, just a general argument that businesses will invest more despite huge excess capacity, and consumers spend more despite still-huge debts and home prices that are likely to resume their decline. Oh, and sure enough, he declared that inflation expectations are well-anchored, although the market says otherwise.

Mohamed El-Erian points out that Bernanke said almost nothing about the linkages to other components of macro policy—particularly fiscal and structural policies; had very few references on what is going on in the rest of the world and how this impacts the US; and did not discuss whether the US is navigating through a series of national and global re-alignments

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