The Fed Believes Continuation in Economic Recovery, Stands Ready for Further Easing

At the annual symposium at Jackson Hole, the Fed Chairman Ben Bernanke reiterated his view that the US economic should continue to expand in the second half of the year, albeit at a relatively modest pace. The Fed pledged to 'do all that it' can to ensure the recovery. It appears the Fed is not likely to implement additional QE measures in current economic condition after the decision to repurchase MBS proceeds.

Bernanke acknowledged that fiscal stimulus and the inventory cycle can drive recovery only temporarily while a sustainable expansion required growth in consumer spending and business fixed investment. While that handoff appears 'to be underway', the pace of growth has been 'less vigorous' than previously anticipated. For stimulus-driven growth to be transformed to private demand-driven growth, strength in the labor market is crucial. Unfortunately, the pace of recovery in output and employment in the US has been slower than 'most FOMC participants projected earlier this year'. Bernanke signaled the pace of recovery in the labor market is essential for the economic outlook and hence the monetary policy.

While the market has widely interpreted the decision made at the August meeting to repurchase MBS proceeds as a sign that the Fed will announce more unconventional easing measures to stimulate growth, the Chairman said the act 'avoided an undesirable passive tightening of policy' which occurred as 'increased refinancing' has led the Fed's holding of agency MBS to run off more quickly than previously anticipated. The decision also underscored policymakers' intent to 'maintain accommodative financial conditions as needed to support the recovery'.

Bernanke added that the central bank is prepared to provide additional monetary accommodation if 'the outlook were to deteriorate significantly', suggesting current market condition, though weak, is not bad enough to trigger further measures. In order to convince the market that the Fed has sufficient tools to boost growth and fight against disinflation, the Chairman highlighted 4 policy options which are 1) conducting additional purchases of longer-term securities, 2) modifying the Committee's communication, 3) reducing the interest paid on excess reserves and 4) increasing inflation goals. The Chairman, however, believes that the first option would be effective in further easing financial conditions.