Our colleague John Curran over at the Curious Capitalist does some close reading of the Fed chairman’s speech in Jackson Hole following today’s tepid growth numbers:
With that less-bad-news-is good-news as a backdrop, Bernanke spoke of the Fed’s policy options in a sluggish world with low interest rates, miniscule inflation and a major headwind called Housing.
Evidently, he hit the right chords because the press and the market reacted positively. Here’s a key snippet of the speech where he speaks of possibly using “unconventional” methods to counter any sudden deterioration in the economy:
We will continue to monitor economic developments closely and to evaluate whether additional monetary easing would be beneficial. In particular, the Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly. The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do. As I will discuss next, the issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool.
The essence of those comments is that the economy is facing no immediate crisis and is recovering, albeit slowly. However if economic conditions deteriorate significantly, Bernanke notes, the Fed will act. The “unconventional” course could entail buying securities in the open market, changing the language used in the Fed’s statements, or lowering the rate that the Fed pays banks to keep their excess reserves at the Fed.
With interest rates currently so low, and the Fed’s traditional ammo so depleted, it is perhaps best to stay forcefully vague at this point. Here’s part of Bernanke’s summary:
Should further action prove necessary, policy options are available to provide additional stimulus. Any deployment of these options requires a careful comparison of benefit and cost. However, the Committee will certainly use its tools as needed to maintain price stability–avoiding excessive inflation or further disinflation–and to promote the continuation of the economic recovery.
Bernanke is signaling he has the tools to take action, even if he won’t commit to anything yet. From a purely political standpoint, that might not be enough for a public that feels gnawing unrest over the stagnant recovery. The next few major economic reports — monthly unemployment numbers for August and September as well as the third revision of second quarter GDP due out Sept. 30 — could significantly affect the electorate’s psyche heading into the midterms.
UPDATE: Steve Gandel parses his use of “slow,” “extend” and the D-word.