Fed Chief Paves the Way for More Easing—Just in Case
Fed Chairman Ben Bernanke paved the way for more quantitative easing on Friday, but he didn't speak with the urgency that some in the markets wanted to hear.
Now investors are focusing on next week’s economic data, particularly the August jobs report Friday, to see if it will show enough weakness to motivate the Fed (learn more) to act.
Bernanke’s long-awaited speech in Jackson Holewas a repeat of his past statements. He basically laid out why he believes past Fed easing has worked and the risks of further easing, but he consoled markets by suggesting the Fed could do more.
“The cost 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,” he said.
Stocks initially sold offwhen traders saw no hard promise of easing in the Bernanke speech, but then rebounded to give the Dow a triple digit gain. Treasury yields fellafter Bernanke’s speech, with the 10-year yield dipping below 1.60 percent as buyers moved in.
“Bernanke has laid the groundwork for taking future action should it be needed—whether any additional action will make a difference is an open-ended question,” said Michael Sheldon, chief market strategist at RDM Financial Group. “However, the fact the Fed remains open has probably provided a floor for markets.”
The Fed chairman also said headwinds to the economy could make the case for the Fed to extend the time frame for its extremely low rate policy. Many Fed watchers have been expecting the Fed to change the expected end date to 2015 from 2014 when it meets Sept. 12 and 13, and Bernanke’s comment was taken as confirmation of that.
J.P. Morgan economists reiterated after the speech that they expect to see the FOMC act in September.
“After today’s speech we remain of the view that the odds are still strongly tilted in favor of an extension of the rate guidance at the next meeting," they wrote. "And while it is a closer call, we do believe this will be supplemented with more asset purchases, including MBS, perhaps executed in a smaller, more incremental, manner.”
San Francisco Fed President John Williams earlier Friday told CNBC’s Steve Liesman that rates could stay low for three more years.
“I don’t know that [Bernanke's] doing anything additional,” said Dan Greenhaus, global market strategist with BTIG. “The speech reads to me like a reinforcement of the Fed minutes—that voting member seem to be leaning towards or are in favor of additional easing.”
The minutes from the last Fed meeting Aug 1. showed that many FOMC voting members were in favor of further easing, but improving economic data and comments from some Fed officials since then dampened expectations that the Fed would act in September.
Greenhaus said he sees a 50-percent chance of Fed action at the next meeting, though some economists see a much lower probability. (Watch: What Happens After Jackson Hole?)
“It was pretty strident,” said David Ader, chief Treasury strategist at CRT Capital of Bernanke’s speech. “Again he brings up fiscal cliff issues, European issues that are outside of the Fed’s control. Nothing new, but he really when out of his way to say what we’ve done is right and it will still have impact.”