Markets held out hope for the “Bernanke put,” a reference borrowed from the perpetually accommodative policy of former Fed Chairman Alan Greenspan. Instead they received the “Bernanke punt,” a football metaphor that applies to this Chairman’s current preference to postpone policy action and deflect full responsibility for rejuvenating a sputtering economy.
Today’s speech by Ben Bernanke in Jackson Hole was one of the most highly anticipated Fed statements in recent memory. The Chairman had the undivided attention of the global markets. Many hoped he would take the opportunity to announce another round of stimulus, perhaps in the form of purchasing government bonds with longer maturities, a policy designed to lower mortgage rates in particular. Such an announcement would have been well received by the increasingly skittish markets.
The U.S. stock market could certainly use a lift. They have been in turmoil since the debt ceiling debacle and stand to post a rather ugly August. Early in the week markets seemed to be anticipating additional stimulus from the Chairman. The anticipation was reminiscent of the “Greenspan put” a conjunctive reference to Bernanke’s predecessor Alan Greenspan and a hedging technique used to limit downside risk. It was often said that during Greenspan’s reign that the market could reasonably expect the Fed to intervene in the event stocks turned south, thus attributing the Chairman’s last name with the perceived removal of any lasting risk.
The Federal Reserve has always preferred an image as a proactive and omnipotent agency. The notion that they merely respond to stock and bond markets has never been well received. Recently the Fed has been concerned that by announcing more stimulus on the heels of the recent correction, pundits would have undoubtedly referred to such action as consistent with a “Bernanke put.”
So instead of buoying the markets with the imminent release of more stimulus, this Fed Chairman punted. He suggested that the he and his committee will not be swayed so easily by the stock market’s downturn. He did finally admit that the Fed’s economic forecasts have been far too optimistic, but he still holds out hope for a second half recovery.
Bernanke then indirectly addressed the primary concern of global markets. He stated there would not be an announcement of QE3 or the like, but did mention that the next Fed meeting in September will now be a two day affair, presumably giving the committee an extra day to reach a consensus and announce further utilization of a “range of tools” to assist a deteriorating economy. Consensus appears difficult and analysts are fairly perplexed as to what tools he is referring to, but nonetheless it appears to be a safe bet that Bernanke stands willing convince his fellow committee members to concoct another dose of stimulus next month. They just want to do it on their own time, thank you.
The next meeting will be a month from today which gives the economy a full 30 days to pull the proverbial rabbit out of the hat and prove the Fed’s forecasts correct. As readers already know, Granada is skeptical of such a scenario and refuses to adopt an investment strategy dependent on such a seemingly unlikely trick.
In addition to deferring monetary policy action for another month, Bernanke also took advantage of his time in the spotlight to make an odd plug for fiscal stimulus. While most thought the ability of Congress to offer more stimulus finally ended with the debt ceiling debate and subsequent downgrade of the United States credit rating, apparently Bernanke disagrees. It is difficult to determine if the motive was to deflect his committee’s responsibility for keeping the economy out of recession or if he and Obama simply share the same speech writer. Bernanke’s comments seemed to include all the bullet points rumored to be included in Obama’s September “jobs plan.” To that, we even heard a rare supporting sound bite from Vice President Biden who suggested that, “Yeah, we should’ve” had more stimulus in 2009 and “I think the economy does need more stimulus” now.
This adds a perplexing item to the agenda on Capital Hill. Obama will presumably waste no time in declaring that the country is in dire need of a jobs plan and that the presumably apolitical Fed Chairman supports such a measure. I’ll be surprised if he repeats the endorsement of his running mate though. Most people would prefer not to use the “s” word in recognition of its reputation for its obscene cost and general ineffectiveness.
Stimulus may resonate with the unemployed but I can’t imagine this will be well received by all members of Congress. The Tea Party certainly won’t spring for it and even more moderate Republicans would prefer revenue neutral stimulus which would require a commitment to eventual spending cuts or tax increases. Even if more fiscal stimulus is packaged under the auspice of job creation I don’t find its passage likely. Obama will likely vent his frustration with Republican opposition on the campaign trail while Republicans are sure to counter by portraying the President as a reckless spender. Bernanke couldn’t resist an opportunity to take a shot at that inevitable conflict, scolding lawmakers involved for the embarrassment of the summer’s debt ceiling debate and calling for a “more effective process” for future negotiation.
The Fed’s attempt to share responsibility for generating economic growth with Congress is understandable. Unfortunately each entity is in a similar predicament. They have already exhausted all of their traditional means for spurring economic activity. In addition they are finding dissension in the adoption or continuation of creative alternatives.
Despite the economy’s lingering ills, investors simply can’t expect a divided Congress to undertake Obama’s call for additional stimulus spending with any seriousness. While Bernanke would prefer to share the responsibility for an economic recovery, his speech only serves to heighten expectations for the September 21st announcement. The prudent investor is intrigued by the Fed’s potential to unveil new “tools” and recognizes their deployment may be well received. Enthusiasm is tempered however by a concern for their long-term effectiveness and the associated cost.