By Craig Masters
Friday, as expected, Ben Bernanke announced that the Fed would need to take action to adjust the markets. Analysts who study the language of the Bernankes of the world so they can interpret for the rest of us have said that Friday’s remarks were especially direct and called the Fed Chairman’s words visionary and forward-looking.
According to Bernanke, the Federal Reserve Bank will need to take “forceful actions” to continue the current economic recovery. In reminding us that the US unemployment rate is two percentage points higher than what he called the, “longer-run normal value” acceptable to the Federal Open Market Committee (FOMC), he said, “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
The language from the man who some might say controls the destiny of the dollar just doesn’t get any more forceful or specific than that.
During his remarks at the Jackson Hole economic summit, Bernanke did not specify what those forceful actions would be, or when they might be implemented. But analysts nonetheless seemed to agree that the Fed could soon act to stimulate growth and lower unemployment. After all, he did say the Fed would be moving to support a “sustainable recovery.”
On the negative side of another Fed stimulus, Bernanke outlined possible pitfalls. Continued unconventional monetary policy ( another QE stimulus), “could impair the functioning of securities markets, … reduce public confidence in the Fed’s ability to exit smoothly from (the stimulus policy) at the appropriate time, …induce an imprudent reach for yield … threaten financial stability,” and perhaps worse of all, the Fed “could incur financial losses should interest rates rise to an unexpected extent.”
Of course no one at the Fed wants to be specific as to what would be considered an “unexpected extent” of rise in interest rates. Neither is there a guideline as to the height of the “hurdles” Bernanke explained must be higher if the Fed is to continue to engage in nontraditional policies to manipulate the economy into recovery.
But Bernanke did say that he felt, “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.”
Meanwhile the European Central Bank has announced a type of QE stimulus for the PIIGS in the European market. With Portugal, Ireland, Italy, Greece, and Spain all economically faltering and unable to obtain credit needed for spending their way out of debt, Mario Draghi of the European Central Bank announced a Euro version of Quantitative Easing buy agreeing to buy PIIGS bonds if the individual countries ask for central bank help and agree to sign agreements outlining measures to be implemented to reduce debt to GDP ratios.
Currently the combined debt to GDP ratios of the 5 worst economies in the EU, PIIGS, average 112%. By comparison, the US ratio is currently at 102% and is projected by Standard and Poor’s analysts to reach 111.9% by 2016.
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