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Bernanke’s Twofold Message: Fed Has Limited Tools Remaining to Boosting Recovery and Government Needs to Be Less Polarized

Posted on August 26th, 2011 | Author: Robert C. Gabrielski

With the revised Commerce Department figures released today showing that the U.S. economy grew by only 1% (down from the 1.3% prior estimate) for the second quarter, Fed Chairman Bernanke delivered his comments at the Jackson Hole, Wyoming, Federal Reserve Board meeting this morning.  Bernanke noted that the Fed will “employ its tools as appropriate” and that it must be “responsive to changes in the economy,” but did not indicate any specific plan of action. However, neither did he rule out any potential asset purchase plan.  Will there be Quantitative Easing 3?  While Bernanke didn’t specifically rule it out, it seems that Bernanke may have postponed any QE3 action until the Board’s September meeting (which he indicated will be increased from one day to two days to more fully discuss the Fed’s options).  As noted in my prior post, at last year’s conference, Bernanke laid out specific steps that the Fed would consider to help boost the weak U.S. economy which resulted in QE2, the Fed’s program of bond purchases intended to pump $600 Billion into the economy.

Today, Bernanke predicted that U.S. economic growth will increase in the remaining two quarters of 2011.  However, he also stated that “this economic healing will take a while, and there may be setbacks along the way.”  He again expressed his concern that inflation continue to be “low and stable over time” and that a central key to overall recovery is that the U.S. get its fiscal house in order in such a way that does not compromise its recovery in the short term and reduce debt without cutting government spending too sharply in the short term.  Bernanke believes, that “[f]ortunately, the two goals of achieving fiscal sustainability—which is the result of responsible policies set in place for the longer term—and avoiding the creation of fiscal headwinds for the current recovery are not incompatible.”

It seems that his message is twofold: (i) at this point, the Fed has a limited amount of tools remaining that could have a significant impact in boosting the recovery; and (ii) the government needs to become less polarized in its approach to addressing economic, spending and tax policy. Bernanke said: “The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.”