Bernanke: Fed Will Provide Policy Accomodation “As Needed” to Promote a Stronger Recovery

Jackson Hole, Wyoming

During the Fed’s annual monetary policy symposium in Jackson Hole, Wyoming held last Friday Fed Chairman Ben Bernanke spoke about challenges to the U.S. economy and recounted the Federal Reserve’s previous monetary stimulus actions that were undertaken to help contain the financial crisis in 2008, admitting that the Fed’s decisive actions provided significant help for the economy.

Since 2008 the Fed Reserve has already pumped $2.1 trillion into the U.S. economy through the first two quantitative easing programs (QE 1, QE2).

In September 2011, the Fed announced plans to lower long term interest rates through an operation called “Operation Twist,’’ whereby the Fed purchases $400 billion in long-term Treasury securities from the sale of short-term government debt. In June 2012, the Fed decided to extend “Operation Twist” for six more months through the end of 2012 by purchasing $267 billion in long term securities.

Some of the major headwinds that the Fed Chairman Bernanke highlighted in his speech on Friday revolves around the unemployment level, the housing sector, and fiscal policy.

Bernanke said that “although the housing sector has shown signs of improvement, housing activity remains at low levels and is contributing much less to the recovery than would normally be expected at this stage of the cycle.”

The Fed Reserve has already acted decisively to avert a further economic slowdown and drive down interest rates to near record levels through their previous stimulus programs (asset-bond buying) and interest rates cuts.

But despite the aggressive monetary policy actions undertaken since 2008, millions of Americans continue to struggle with high debt loads and owe more money on their home (negative equity) than they are worth due to the U.S. housing crisis.

Consequently, it is difficult for many U.S. homeowners to refinance their home mortgages and take advantage of the low interest rates to  help ease their household finances.

According to Zillow, of all homeowners, 15.3 million (30.9 percent) remained underwater in the second quarter, even though this is a reduction from the 15.7 million homeowners or 31.4 percent in the first quarter.

In the Wall St. Journal University of Chicago professor Amir Sufi  said “households burdened by heavy debt loads aren’t responding to low interest rates by spending more, as typically happens in a crisis. They need to reduce their debt first”, he said.

“I’m not so convinced that monetary policy can play a big role,” Sufi said.

Unemployment Level

Chairman Bernanke admitted the rate of improvement in the labor market has been “painfully slow” despite the fact that the unemployment rate has lowered to 8.3 percent from its cyclical peak of 10 percent while payrolls rose by 4 million jobs from their low point.

Chairman Bernanke explained that the unemployment rate remains more than 2 percentage points above what most FOMC participants see as its longer-run normal value.

Fiscal Policy

Another challenge for the U.S. economy is an area the Federal Reserve has little control over: fiscal policy.

Chairman Bernanke said that fiscal policy, at both the federal and state and local levels, has become an important headwind for the pace of economic growth.

“Notwithstanding some recent improvement in tax revenues, state and local governments still face tight budget situations and continue to cut real spending and employment. Real purchases are also declining at the federal level” Bernanke said.

“Uncertainties about fiscal policy, notably about the resolution of the so-called fiscal cliff and the lifting of the debt ceiling, are probably also restraining activity, although the magnitudes of these effects are hard to judge” he admitted.

Although housing and the employment picture have shown a slight improvement in recent weeks, economic growth remains slow with an annual rate of just 1.7 percent (GDP) in the second quarter, making it unlikely for the U.S. unemployment level to fall much below 8.3% before the U.S. presidential election in November.

Chairman Bernanke concluded his speech by stating that the Federal Reserve will provide additional policy accommodation “as needed” to promote a stronger economic recovery and sustained improvement in labor market conditions.

Peter Elston of Aberdeen Asset Management told Bloomberg, “The key words in his statement were “as needed.”

“He will act ‘as needed’ and right now he is not needed. What will constitute being ‘as needed’ is some sort of severe contraction” Elston said.

Following Chairman Bernanke’s speech last Friday the U.S. stock market rallied based on the hopes that the Fed Chairman would engage in further stimulus measures in the near future, perhaps as early as September 13th during the next FOMC Meeting.


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