Bernanke speech: what is the remedy for America’s deep-rooted problems?

25th August 2011

Throughout the week, there has been endless speculation and anticipation of the comments and actions we might expect from him when he addresses fellow central bankers at Jackson Hole on Friday.

There is no doubt he is in a really tough spot, with the remedy for American's deep-rooted problems resting firmly on his shoulders – but what will he do?

Can we expect a third round of quantative easing?

Much speculation surrounds whether the Fed will launch another round of "quantitative easing", or QE3, as a way of shoring up the economy.

However, so far, the signs are that QE3 is not on the cards. The Fed has been silent in contrast to the warm-up they did for Bernanke last time.

Bloomberg reports that Bernanke tomorrow may disappoint stock investors betting on a commitment to step up stimulus. He has little choice, given rising consumer prices and a U.S. economy that is still growing.

The report says: "Gasoline costs are 33 percent higher, consumer inflation is twice as fast and inflation expectations are above levels since Bernanke signaled more easing a year ago…"

The Washington Post reports that QE might "merely succeed in demonstrating the law of diminishing returns". Meanwhile, the core rate of inflation (price increases excluding food and energy costs) has crept up to within striking distance of the Fed's 2 percent target. Printing more money might push it above that, unleashing dangerous inflationary expectations.

But the question Bernanke should be asking, according to Mindful Money economist blogger Shaun Richards is – How did I get here?

Shaun says on his blog: "This poses real problems for Ben Bernanke and for those who feel he has the ability to improve the world economy. He must review the results of his actions with dismay. If we were able to borrow Doctor Who's Tardis and go back to 2003 when he wrote his economic paper on what central banks could do in the situation he now finds himself in he was full of optimism and bombast whereas reality has proved much more inconvenient."

Shireblogger comments, and adds: "Any discussion of Bernanke should bring in two other names, Henry Paulson and Tim Geitner. The three were the architects of the response to the events of 2008. Central banks have now become stabilisers ( not lenders) of last resort to financial institutions and their markets…"

… If only Mr. Bernanke could bring about durable economic recovery by waving a monetary magic wand. But, alas, he can't – he's only human.

On what those ‘in the know' should be doing, Kim Stephenson, Mindful Money's resident psychologist , says: "Nobody knows.  Everybody's guessing and after it's happened we still won't know why it happened the way it did."

So…time to do nothing?

There is certainly plurality around the idea of taking no action for now rather than implementing QE3.

Larry Elliott in the Guardian says: "There is one school of thought which argues that the best course of action for policymakers would be to do nothing. Given time, low interest rates and the boost to the money supply will lead to recovery: all that is required is patience.

"This advice is unlikely to be heeded if activity weakens over the coming months. In those circumstances, careful thought should be given to the best way of boosting output, since it is by no means obvious that QE in its current form is the best solution."

David Harris, fund manager of Schroder's US fixed income fund says that amongst the bond investor community, the view is that nothing new will be announced in Bernanke's speech.

He says: "We agree with the consensus.  Bernanke and Fed members have been exceptionally clear in outlining the additional tools they would use to continue to ease monetary policy to support economic growth, and recent weakness in both data and markets has raised some expectations for the next stimulus measures.

"We expect a program similar to last year, where the additional tools were addressed without committing to implementation, though with recognition that current pace of growth has been disappointing."

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