Bernanke says that the reason we the way we are growing so fast is because of the stimulus. Expects economy to pickup even further

Fed Chairman Bernanke spoke at the Kansas City Fed's annual symposium in Jackson Hole this morning. Bernanke seems to be blessing the policy response given by Washington in his latest speech.  Key takeaways were that he supported the stimulus package and increasing unemployment benefits.  He says that it helps stimulate demand.  One of the problems that I have had with Bernanke from the getgo has been his willingness to become the monetary tinkerer in cheif. 

Below are some key quotes, via Federal Reseve:


On the economy

"Fiscal policy--including stimulus packages, expansions of the social safety net, and the countercyclical spending and tax policies known collectively as automatic stabilizers--also helped to arrest the global decline. "

"the overhang of foreclosed-upon and vacant housing and the difficulties of many households in obtaining mortgage financing are likely to continue to weigh on the pace of residential investment for some time yet."

"the task of economic recovery and repair remains far from complete."

“growth during the past year has been too slow and joblessness remains too high. Financial conditions are generally much improved, but bank credit remains tight."

"Overall, the incoming data suggest that the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat weaker than most FOMC participants projected earlier this year."

"I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace. Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place.”

On inflation/deflation

“Falling into deflation is not a significant risk for the United States at this time.”

"Recently, inflation has declined to a level that is slightly below that which FOMC participants view as most conducive to a healthy economy in the long run."

"With inflation expectations reasonably stable and the economy growing, inflation should remain near current readings for some time before rising slowly toward levels more consistent with the Committee's objectives."

"At this juncture, the risk of either an undesirable rise in inflation or of significant further disinflation seems low."

On the Fed's decision to keep balance sheet high by reinvesting MBS and GSE paydowns into Treasuries

“At their most recent meeting, FOMC participants observed that allowing the Federal Reserve's balance sheet to shrink in this way at a time when the outlook had weakened somewhat was inconsistent with the Committee's intention to provide the monetary accommodation necessary to support the recovery … In response to these concerns, the FOMC agreed to stabilize the quantity of securities held by the Federal Reserve by re-investing payments of principal on agency securities into longer-term Treasury securities.”

On future policy accommodation

“At this juncture, the Committee has not agreed on specific criteria or triggers for further action.”

“Should further action prove necessary, policy options are available to provide additional stimulus.”

BOTTOM LINE

My take away from this speech as that while Bernanke explicitly states that the Fed stands ready to provide additional monetary stimulus if needed, policymakers do not have a set criteria for further action, have some concern about the risks associated with additional stimulus, and are uncertain about effectiveness of a larger balance sheet now that financial conditions are more stable (though Bernanke states that he believes additional purchases would be effective in easing financial conditions). Bernanke noted that recent economic data suggest the recovery has slowed and inflation is running below levels with which the Fed is comfortable. However, he states that he expects growth to pickup and he does not see a significant risk of deflation. Thus, despite leaving the door open to further stimulus, Bernanke's speech suggests that such action may not be as close as market participants thought. The outlook for monetary policy will be data-driven and all eyes now turn to next week's key updates on the August economy with ISM manufacturing and employment.

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