by Calculated Risk on 8/31/2012 06:29:00 PM
Friday, August 31, 2012
"The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years."
Fed Chairman Ben Bernanke, August 31, 2012
From a research note today by Andrew Tilton at Goldman Sachs:
In the most striking line of the speech, Bernanke professed “grave concern” about the weak labor market and the potential human and economic cost of persistently high unemployment. Although consistent with prior comments about long-term unemployment and the risk of hysteresis, these are very strong words from a Fed chairman. When one has a “grave concern”, action—quite possibly aggressive action─is appropriate.And from Tim Duy at EconomistsView: Bernanke at Jackson Hole
The Chairman’s remarks strengthen our conviction that the Fed will ease in September, most likely by pushing out its guidance that rates will remain “exceptionally low at least through late 2014” to mid-2015 or beyond. We now think the probability of an announcement of further asset purchases is close to 50/50 in September, though our base-case forecast is still that this is more likely in December or early 2013. When and if asset purchases do occur, we expect them to be concentrated in agency mortgage-backed securities, and on an open-ended basis (i.e. a monthly rate of purchases) with changes in the rate of purchases conditional on the economic environment. Our views could still change depending on how economic data and financial conditions evolve between now and the September 13 announcement.
On net, Bernanke's speech leads me to believe the odds of additional easing at the next FOMC meeting are somewhat higher (and above 50%) than I had previously believed. His defense of nontraditional action to date and focus on unemployment point in that direction. This is the bandwagon the financial press will jump on. Still, the backward looking nature of the speech and the obvious concern that the Fed has limited ability to offset the factors currently holding back more rapid improvement in labor markets, however, leave me wary that Bernanke remains hesitant to take additional action at this juncture. This suggests to me that additional easing is not a no-brainer, but perhaps that is just my internal bias talking.