Analysts had been playing down the significance of US Federal Reserve chairman Ben Bernanke’s speech at the Jackson Hole conference, pointing out that the chances of his announcing a third round of quantitative easing (QE) were slim. As expected, he did not announce QE3, but that didn’t stop US equities from rallying. One reason could be short-covering. But the speech also held out hope and comfort to the markets.
While he didn’t mention any specific proposals, the Fed chairman reiterated that he had a “range of tools” that he could use if needed to stimulate the economy. This remark was aimed at nipping in the bud the growing feeling among investors that the central bank was running out of options. There are good reasons for the scepticism. The second round of QE might have increased asset prices, but that it had done very little for the US economy is evident from the current deceleration in growth. But Bernanke cleverly used the occasion to send a positive message on growth—he asserted that he was optimistic about the long-run prospects of the US economy and that “the growth fundamentals of the US do not appear to have been permanently altered by the shocks of the past four years”. In other words, he’s saying he doesn’t agree with the much-touted New Normal, which argues that the US is in for a prolonged period of low growth. And just in case the markets remained unconvinced by his views on the economy or in his new monetary toolkit, he also announced the next Federal Open Markets Committee meeting in late September would be for two days instead of one, fanning speculation he might bring out one of his new tools then.
At least initially, Bernanke’s speech has been well-received by the equity market. The fact remains, however, that he has hardly said anything new. One clue can be found in a rally in gold, which indicates that the level of uncertainty in the market remains very high.
Perhaps more important is the Fed chairman’s insistence that most of the policies that sustain economic growth in the long-run are outside the province of the central bank. Simply put, he was alluding to structural impediments in the US economy that need to be addressed, fairly and squarely, by effective government policy. That is a message that applies not only to the US, but to policymakers around the world, whether they are euro zone governments grappling with crisis, Chinese policymakers trying to shift their focus from investment-led growth, or an Indian government trying to achieve double-digit growth. The real message from Jackson Hole is that the time for band-aids is over and structural reform is essential.
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