Federal Reserve Chairman, Ben Bernanke, disappointed investors yesterday when he failed to announce additional stimulus measures to help boost the ailing US economy. Instead, Bernanke opted to keep his powder dry in case of further economic deterioration or sudden panic in the financial markets. As this article demonstrates, Bernanke still has plenty of bullets and he will use them sooner or later.
No additional stimulus yet
Despite the recent drop in US GDP from 2% in the first quarter of 2012, to 1.5% in the quarter ending 30 June, the Federal Reserve’s Federal Open Market Committee (FOMC) chose not to announce any additional stimulus measures at the conclusion of yesterday’s meeting.
The opening sentence of the press release issued by the FOMC reads, “Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year.”
However it then explains why they chose to take no action: “The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate.”
The FOMC admitted that, “strains in global financial markets continue to pose significant downside risks to the economic outlook” saying that it would continue to support the US economy with “a highly accommodative stance for monetary policy” that is, “likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”
Finally the committee stated that it would, “closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in [the] labor market”.
Plenty of bullets remaining
Some economic commentators believe that Ben Bernanke has failed to act because he is out of bullets, however this is not a view we share. In fact, on 13 July 2011, speaking before the Committee on Financial Services, Bernanke spelled out some of the tools available to him.
“Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further. One option would be to provide more explicit guidance about the period over which the federal funds rate and the balance sheet would remain at their current levels. Another approach would be to initiate more securities purchases or to increase the average maturity of our holdings. The Federal Reserve could also reduce the 25 basis point rate of interest it pays to banks on their reserves, thereby putting downward pressure on short-term rates more generally… Prudent planning requires that we evaluate the efficacy of these and other potential alternatives for deploying additional stimulus if conditions warrant.”
On 21 November 2002, in his speech before the National Economists Club in Washington, Bernanke made the following statement.
“US dollars have value only to the extent that they are strictly limited in supply. But the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost. By increasing the number of US dollars in circulation, or even by credibly threatening to do so, the US government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
A little later in the speech, Bernanke went on to make his famous statement about using “helicopter drops” to put money into the economy to fight deflation. Ever since then Bernanke’s critics have referred to him as “Helicopter Ben”.
There can be little doubt that Bernanke will employ these measures (and more besides) if, or rather when, they are needed.
Stimulus from all sides
Although the Fed has not yet announced another major round of money printing, today we will hear from the ECB and the Bank of England (BoE), both of which may announce additional stimulus.
Last week, ECB president, Mario Draghi, said he is ready to do “whatever it takes” to support the euro, prompting a rally in shares and the single currency. The ECB may not act today, but they too will be forced to implement aggressive stimulus measures sooner or later.
Meanwhile, the BoE will also announce its latest decision on monetary policy with several analysts predicting either an additional rate cut, or an extension of the bank’s quantitative easing programme. Both of these moves are inevitable in our view.