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Bernanke’s Speech on August 27 – What to Look For

Contributed by Northern Trust

By Northern Trust

Chairman Bernanke is scheduled to deliver the opening remarks for the annual symposium at Jackson Hole, Wyoming, on August 27.  The Fed has made available the topic of Mr. Bernanke's remarks "The Economic Outlook and the Federal Reserve's Policy Response".  Bernanke's speech will not be followed by Q&A.  All other speeches and papers are embargoed.

The last official communiqu? from the Fed is the August 10 FOMC policy statement.  The Fed indicated that it would maintain the face value of current holdings of securities ($2.05 trillion) and it would purchase longer term Treasury securities to replace retiring mortgage-backed securities on its books.  The Fed's reasons for maintaining a stable balance sheet and what it hopes to achieve from this policy stance need a detailed explanation.  Chairman Bernanke could use this opportunity to elaborate on this matter.

In a speech on January 13, 2009 (The Crisis and the Policy Response), Chairman Bernanke made a distinction between "quantitative easing," the monetary policy strategy of the Bank of Japan, and "credit easing" of the Federal Reserve.

Our approach--which could be described as "credit easing"--resembles quantitative easing in one respect:  It involves an expansion of the central bank's balance sheet.  However, in a pure QE regime, the focus of policy is the quantity of bank reserves, which are liabilities of the central bank; the composition of loans and securities on the asset side of the central bank's balance sheet is incidental.  Indeed, although the Bank of Japan's policy approach during the QE period was quite multifaceted, the overall stance of its policy was gauged primarily in terms of its target for bank reserves.  In contrast, the Federal Reserve's credit easing approach focuses on the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for households and businesses.

Where does the recent goal of maintaining a given size of the balance sheet feature in this distinction between "credit easing" and "quantitative easing?"  Maybe the speech will address this issue.

Jon Hilsenrath's article in The Wall Street Journal on August 24 (Fed Split on Move to Bolster Sluggish Economy - WSJ.com) highlights that different points of view have emerged within the FOMC; seven members out of seventeen are questioning the need to ease monetary policy.  The minutes of the August 10 FOMC meeting are scheduled for publication on August 31.  The story appears to be a deliberate leak from the Fed but the motive is unclear.  It is perhaps a preparation for financial markets before the minutes are released or a prelude to Bernanke's speech.  Markets will be looking for Bernanke to shed light on the many unknowns.  Bernanke has written and spoken extensively about steps the Bank of Japan should have adopted to end the economic and deflationary quagmire.  Some aspects of these suggestions are yet to be implemented in the United States and they could be incorporated in tomorrow's speech.

The Fed downgraded its outlook about the U.S. economy in the August 10 policy statement.  In July, the Fed published the central tendency for real GDP growth in 2010 as 3.0% to 3.5% and 3.5% to 4.2% for 2011.  The preliminary estimate of real GDP for the second quarter will be published on August 27, a few hours prior to the Chairman's speech.  The market consensus is a downward revision of the advance estimate of 2.4% growth.  Mr. Bernanke's prediction about the growth trajectory for the second-half of the year will be another important insight from the speech.

Initial Jobless Claims Decline, Underlying Tone Unchanged

Initial jobless claims fell 31,000 to 473,000 during the week ended August 21.  The four-week moving average of initial claims stands at 486,750, an elevated level raising the level of concern about labor market conditions.  Continuing claims, which lag initial jobless claims by one week, fell 62,000 to 4.456 million.  These claims have held around 4.5 million for several weeks.  The level of continuing claims is far above the level consistent with a growing economy (see chart 2).

Total continuing claims, sum of those under regular state programs and those under special federal programs, moved higher to 10.355 million during the week ended August 7 vs. 10.0 million in the previous week.  The labor market data continue to haunt policy makers.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.