Dow Jones Reprints: This copy is for your personal, non-commerical use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visit www.djreprints.com
BEN BERNANKE SPOKE SOFTLY Friday in Jackson Hole and reminded everybody the Federal Reserve still has big sticks it can use to combat deflation and counter a new renewed downturn in the economy.
But, the Fed chairman emphasized, the tools are not needed now. But they're there at the ready, should the economy deteriorate—which he pointedly said is not the central bank's expectation.
The markets evidently decided that there being no news in the Fed chairman's much-anticipated speech was good news. The major stock-market averages were up about 1% at midday Friday while Treasury yields, which had been driven to new lows by relentless pessimism about the economy earlier in the week, ticked higher.
Maybe it was a sigh of relief that the Fed doesn't view the outlook as so dire as to require aggressive new actions. Or that the revision in the second-quarter's gross domestic product reported earlier Friday, to a 1.6% annual rate from the original estimate of 2.4%, wasn't worse. Or that the University of Michigan's latest reading on consumer confidence was little changed. Or that the Economic Cycle Research Institute's Weekly Leading Indicator has stabilized, albeit at about a negative 10% growth rate.
Or maybe the markets are up because the bad news is already discounted in stock prices. Intel (INTC) is up more than 1% at midday even after lowering its outlook; but that's after having suffered its own bear market, having fallen from over 24 in April to below 18 earlier this morning. A stock that doesn't go down on bad news probably may be sold out, or at least ripe for short-covering.
Or maybe it's because it's Friday, the sun has come out after a dreary week and it's a good time to cover short position before heading out for the penultimate weekend of the summer season. Plus, Tiger's back on top of the leader board. So, all's right with the world.
As for Bernanke, though he conceded "although private final demand, output, and employment have indeed been growing for more than a year, the pace of that growth recently appears somewhat less vigorous than we expected." Moreover, "the prospect of high unemployment for a long period of time remains a central concern of policy," he continued. Finally, he added, "Recently, inflation has declined to a level that is slightly below that which FOMC participants view as most conducive to a healthy economy in the long run."
But Bernanke wasn't ready to launch "QE2" or further quantitative- easing measures through the additional purchases of securities to expand the Fed's balance sheet further. He did note approvingly that the central bank's previous purchases, which accelerated sharply starting in March 2009, gave a big boost to financial conditions. The decision at the FOMC's meeting earlier this month to reinvest principal payments on its mortgage-backed securities in Treasuries prevented an inadvertent tightening of policy, Bernanke pointed out.
As for additional steps the Fed could take should it deem necessary, Bernanke said it could lower the interest rate it pays on required reserves, or IOER, from the current 0.25% to 0.10% or even zero. The impact from that change would trivial, he conceded.
The FOMC could use its rhetoric to extend the "extended period" during which the monetary authorities have said they would maintain extraordinarily low rates, which would shape expectations and theoretically lower longer-term rates. But Bernanke noted the difficulties in communicating the FOMC's intentions "with sufficient precision and conditionality." In other words, they could change their minds if conditions change.
But the Fed chief pointedly rejected a proposal for the policy makers to target higher inflation explicitly, one that was pushed earlier in the year by the International Monetary Fund. Central bankers can never be seen as deliberately seeking inflation, especially one with the nickname of Helicopter Ben.
That moniker stems from Bernanke's famous 2002 speech, in which he invoked Milton Friedman's metaphor of dumping cash from helicopters to fight deflation, which is the practical effect of a central bank's purchases of government bonds. QE2, slang for the second phase of quantitative easing, remains docked until conditions dictate Captain Ben and the rest of his crew sets sail.
In Jackson Hole, Bernanke endorsed continuation of the policy status quo while it monitors the economy, but emphasized the Fed's readiness and willingness to move in response to further deterioration or deflation.
But it would take a lot more bad news on the economy to get the FOMC to act. As the Wall Street Journal reported earlier, seven of the 17 Fed officials attending the Aug. 10 FOMC meeting expressed misgivings about the plan to reinvest maturing MBS in Treasuries instead of letting them run off, making the decision less one-sided than the 9-1 official vote would indicate. (Seven of the 12 Fed district presidents vote though nonvoters sit in.)
I also think the FOMC would rather not do anything at the next regular meeting on Sept. 21, just as the mid-term Congressional campaigns kick into high gear. The following gathering is scheduled for Nov. 2-3, concluding the day after Election Day. That gives the Fed a perfect opportunity to stay above the political fray, provided the economy and the financial markets cooperate.
E-mail: randall.forsyth@barrons.com
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Yahoo! Buzz
MySpace
Digg
del.icio.us
NewsVine
StumbleUpon
Mixx
Credit Suisse says U.S. Steel and AK Steel are vulnerable to a price slump.
A weak forecast sent the high-end clothing retailer's stock to a 52-week low. We, however, think shares will come back into style.
RBC Capital upgraded the refiner to Outperform.
Auriga says First Solar is best positioned in the group.
First Global downgraded the drug firm to Market Perform.
Down 60% in the past two years, the natural-gas producer's stock is priced to buy. Rigged to Rise
Paul M. Hazen bought 125,000 shares of the specialty-financial firm.
Dundee Capital says a Chinese firm may seek to form a partnership.
Sandler O'Neill initiated coverage with a Buy rating.
The liquor and beer maker's annual results weren't worth celebrating, but a higher stock price may soon be brewing.
Collins Stewart evaluates Compellent, Isilon and CommVault.
Sterne Agee raised estimates on the insurer.
Frontier Communications offers the S&P 500's best yield, but the story only starts there.
William R. Shepard bought 5,000 shares of the futures-trading exchange.
These firms are reaping large profits with lean resources. (At SmartMoney.com.)
Washington and GM have very different goals. But both are eager for an IPO that could value the car maker at $60 billion.
All the hype about a bubble in Treasuries is just that.
Putnam's asset-allocation chief says that the old ways aren't working. Big on high-yield bonds, European and big-cap stocks, lukewarm on Treasuries.
Spending by consumers and businesses isn't collapsing, despite what some economists and members of the media contend.
Helmerich & Payne makes the rigs explorers need to pull hard-to-extract, liquid-rich natural gas from shale. The potential could transform pricing in the industry.
Three recently introduced software applications that can help your trading, portfolio analysis and tax reporting.
Read Full Article »