Fed Chairman Ben Bernanke gave the much anticipated speech at the annual banking conference in Jackson Hole, Wyoming without announcing any new plans to introduce another round of quantitative easing by printing more money and buying up additional long-term treasuries.
Last year at this same conference Bernanke gave an introduction to his plans of quantitative easing or QE 2 that included buying $600 billion in Treasury securities between November 2010 and June 2011 that eventually led to a Fed portfolio of treasuries and mortgage securities of more than $2.5 Trillion.
Quantitative easing was intended to stimulate an economy through the central bank’s purchase of government bonds or other financial assets. Often, central banks use quantitative easing when interest rates are already zero bound, or at near 0% levels. This type of monetary policy increases the money supply and typically raises the risk of inflation. Quantitative easing (QE) is not specific to the U.S., however, and is used in a variety of forms by other major central banks.
Given the state of the economy, the wild swings of the U.S.stock market, the impact of long-term unemployment for so many people in this country and the ongoing rise of food and commodity prices the effect of QE2 was considered by many as a failure to strengthen the economy. What it did do is lower the value of the U.S. dollar and promote the value of gold.
Instead of focusing strictly on monetary policy that is the Fed’s primary responsibility, Bernanke also spoke to the problems of U.S.fiscal policy. He lambasted political leaders for the awful debt crisis debate, “The negotiations that took place over the summer disrupted financial markets and probably the economy, as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S.financial assets or to make direct investments in job-creating U.S.businesses.”
Bernanke also suggested that the government address the nation’s extraordinarily high levels of long-term unemployment by using federal policy to help get some of these people back to work that might prevent the loss of many skills and forcing many people to simply not get work at all.
In his final comments he suggested the government reform the tax code, rebuild infrastructure, and support new research by having the country’s leaders “promote stronger economic performance through the design of tax policies and spending programs.
He did include in the speech comments that the nation faces significant challenges with unemployment and an unsustainable federal debt leading the list of problems. The conclusion of the speech he offered no intentions of providing any new monetary policy other than his earlier position that the Fed has done as much as it can…now it’s time for the rest of the government to do more. Bernanke reaffirmed that he intended to hold short term interest rates near zero at least until the middle of 2013.
As you know there are right wing political voices continually criticizing the Fed for a number of issues but primarily the excessive printing of new money. One of the current GOP candidates for the nomination next year, Ron Paul, has actually called for the abolishment of the Federal Reserve System entirely.
What does this mean for the average American citizen? At the moment, not much, other than a stay on course monetary policy hoping that the politicians will get their act together to solve the debt problem of the country and get Americans back to work.
As Bernanke closed his speech this morning he indicated that he will do whatever necessary to make sure the economy stays on track, “I do not expect the long-run growth potential of the U.S.economy to be materially affected by the crisis and the recession if…and I stress if…our country takes the necessary steps to secure the outcome.”
Bernanke has tossed the ball into the other court; now it’s time for the rest of the U.S.government to do their part of the deal. What are the odds?
“It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
Henry Ford, U.S.Industrialist (1863-1947)