U.S. Economic Outlook and the Federal Reserve's Policy Response at the Jackson Hole Symposium

Fed Chairman Bernanke provided a fulsome discussion of the options open to the Fed to provide additional support to the economy, if required, but provided no substantive guidance regarding the trigger for such actions to be implemented. The Chairman reiterated that the recovery has disappointed the Fed in recent months while sticking to the view that the conditions for a pickup in growth 2011 are in place. The Chairman reviewed recent events listing the usual disappointments (labour markets, consumer spending and housing) and stated his expectation that growth will "continue to expand in the second half of this year, albeit at a relatively modest pace." Support from easy monetary policy, accommodative financial conditions and evidence that banks are more willing to lend, sets up the economy to grow at a more rapid rate in 2011, he said. Against this backdrop, the unemployment rate will be slow to decline. The Chairman considers both upside and downside risks to inflation as being low although promised to monitor developments closely.

The discussion of policy going forward was concentrated on the tools available to provide further support to the recovery if it is needed. The tools discussed included "making additional purchases of longer-term securities, modifying the Committee's communication, and reducing the interest paid on excess reserves," with both pros and cons associated with implementing each of these tools fleshed in. The Chairman discussed a fourth alternative: increasing the medium-term inflation goal but discounted this as a viable alternative because the associated risks outweigh the benefits in his view. As to the triggers that would make the Fed implement additional easing, the Chairman stated that, "the Committee has not agreed on specific criteria or triggers for further action."

With the current level of inflation seen as being slightly below what the Fed considers conducive to a healthy economy in the long run, the speech concluded that the Fed will, "strongly resist deviations from price stability in the downward direction." To be sure, the Fed sees the risk of deflation being low at this juncture. The Fed's commitment to ensuring that the recovery remains on track was strenuously stated. So while we remain in the dark as to the exact triggers for the Fed to boost the amount of stimulus hitting the economy, policymakers are committed to acting if the economy fails to emerge from its current soft patch.