Posts Tagged ‘August 26’
By Greg Robb
August 25, 2011
Bernanke will open the Fed conference with a speech on Friday morning at 10 a.m. Eastern. Stocks have moved higher this week after being pummeled in mid-August, and many analysts attribute the move to investor hopes that Bernanke will use his speech to promise another round of asset purchases, or QE3.
Economists said that the recent weakness in the economy stems from structural issues like foreclosed properties and an unskilled pool of unemployed labor that are immune from monetary policy stimulus.
“I hope he talks about the limitations of monetary policy,” said Mickey Levy, chief economist at Bank of America.
Fed policy is very effective at preventing a downturn but once weak demand is in place, monetary policy cannot lift it, Levy said.
“All the targeted counter-cyclical stimulus is not going to address the huge pocket of distressed properties,” Levy said.
John Silvia, chief economist at Wells Fargo, agreed that the woes facing the economy are structural in nature and described the Fed policy options as modest.
“The Fed has shot the big cannons. They are now playing the game with smaller ammunition,” Silvia said.
At its interest rate meeting earlier this month, the central bank surprised the markets by promising to keep its benchmark Federal funds rate near zero until mid-2013.
Former Fed governor Randall Krozner said that is all the Fed is prepared to do at the moment, and speculation of an announcement of QE3 in markets was misplaced.
Such a big policy shift would only come at a formal Federal Open Market Committee meeting and not in a speech, he said.
Many Fed watchers, including former vice chairman Alan Blinder, believe the central bank is likely to engineer another round of asset purchases, or quantitative easing. Bernanke ready for action but when is in doubt.
In the first round of bond purchases between Dec. 2008 and March 2010, the Fed bought $1.7 trillion of mostly mortgage securities, and in the second round between November and June, the central bank snapped up $600 billion of Treasury bonds.
These purchases did not stimulate demand, Levy noted.
“The slowdown is not the fault of not enough liquidity,” he said.
Levy said he expected Bernanke to say the Fed will do whatever it has to do to avoid recession.
Ultimately, the next step is likely to be take steps to alter the composition of the composition of the Fed’s balance sheet to keep bond yields low, he said.
“That is all the Fed can do,” Levy said.
“More QE would not help. Lower long-term yields on the margin would help,” he added.
Silvia forecast sluggish growth in the 2% range over the next 18 months.
“We are in one of those periods where the economy grows far below potential and the unemployment rate will probably rise,” he said.
“It is a very challenging economy. I just don’t see a silver bullet or a special spark,” he said.
Read the entire article HERE.