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Bernanke at Jackson Hole: No More Easing, For Now

Federal Reserve Chairman Ben Bernanke delivered a mostly somber message on growth Friday, but offered no further central bank action to stimulate the moribund economy.

Ben Bernanke in Jackson Hole on August 31, 2012.
CNBC
Ben Bernanke in Jackson Hole on August 31, 2012.

In his much anticipated speech from the central bank summit in Jackson Hole, Wyo., Bernanke reiterated his position that the Fed's Open Markets Committee stands at the ready to provide help but is not yet unleashing additional stimulus.

As Bernanke's remarks were reported on CNBC, the stock market initially ceded most of its gains but then bounced back on speculation that Bernanke may be building the case for more easing further down the road.

Bill Gross, head of bond giant Pimco, said on Twitter that the remarks make more stimulus "a near certainty" though "increasingly impotent."

Further Fed action is viewed with wariness in Washington as legislators worry about the potential inflationary effects from central bank money printing. But Bernanke contended that the risks are "manageable."

"The hurdle for using nontraditional policies should be higher than for traditional policies," he said. "At the same time, the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant."

(Get the full text of Bernanke's speech here.)

Wall Street began to buzz that Bernanke was indicating that while he's not ready to pull the trigger on more easing, the day is getting nearer absent any major economic improvement.

"The market initially sold the Bernanke Jackson Hole speech news, but after going through the comments, I think Ben tipped his hand to the market," said Brian Sozzi, chief equities analyst at NBG Productions in New York. "At the next policy meeting (in September), with press conference and all, additional unconventional accommodation is probable."

But the Fed is in somewhat of a political box with the presidential election drawing near. Consequently, it may have a choice either to act at the September FOMC meeting, or not at all until the November vote is cast, said Erik Davidson, deputy chief investment officer for Wells Fargo Private Bank.

"Ben Bernanke recognizes that he's going where no man has gone before with these nontraditional stimulus measures," Davidson said. "He recognizes that there's a cost-benefit to that, that there's a trade-off, that the potential cost of that is much more significant than traditional monetary policy. He's cautious to use it, but he certainly will."

Bernanke has utilized the Jackson Hole speech in the past to tip his hand about asset purchases known as quantitative easing (learn more). The Fed has expanded its balance sheet to $2.8 trillion through two rounds of QE, by purchasing Treasurys and other debt to goose the stock market and stimulate the economy.

The central bank also has kept its funds rate target near zero and has indicated that policy is unlikely to change until at least 2014.

But rather than deliver a substantial shot of adrenaline, Bernanke's speech was mostly an academic exercise that explained the Fed's rationale for its actions since the 2008 financial crisis, with just a smattering of its intentions going forward.

"We're at that inflection point that as the economy comes off life support, at some point the doctor says you don't need the medicine anymore," Davidson said. "But this doctor has been extremely clear that he stands at the ready to deliver the medicine."

Bernanke said research shows that Fed asset purchases "have significantly lowered" yields for long-term Treasurys, corporate bonds and mortgage-backed securities, while lifting stock prices and helping the economy.

"It is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC's decision to greatly expand securities purchases," Bernanke said in his prepared remarks. "This effect is potentially important because stock values affect both consumption and investment decisions."

Investors seem to have been pricing in monetary easing both from the Fed — in what the markets are calling QE3, for the third round of stimulus — and the European Central Bank, which is struggling to put a lid on the continent's sovereign debt crisis.

Bernanke's speech comes as the equity markets, though prone to violent swings, have been humming along while the economy struggles.

The Standard & Poor's 500 has gained more than 11 percent in 2012, a critical measuring stick Bernanke and the rest of the Fed's Open Market Committee use in determining monetary policy. The Dow industrials are up about 6.5 percent while the Nasdaq tech gauge has surged 21 percent.

Yet the market's strength has been dimmed by a meager 1.7 percent growth in gross domestic product for the second quarter. Inflation is right around the Fed's favored target of 2 percent and the housing market is showing signs of modest improvement. (Read More: Why Aren't Candidates Talking More About Housing?)

Unemployment stands at 8.3 percent, which Bernanke said is 2 percentage points higher than where the Fed would feel comfortable.

"Unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time," he said.

Economists and market strategists, though, have expressed almost universal doubts about whether a third round of quantitative easing will provide a significant lift to the economy or the stock market.

"The failure of the economy to recover strongly in recent years has cast doubt on the healing properties of unconventional monetary stimulus," said John Higgins, senior markets economist at Capital Economics. "Skepticism has usurped optimism."

Bernanke insisted that the economy has been boosted by the Fed's actions.

"Model simulations conducted at the Federal Reserve generally find that the securities purchase programs have provided significant help for the economy," he said.