U.S. Dollar Gains, S&P Tumbles as Bernanke Signals No Further Stimulus
THE TAKEAWAY: Federal Reserve Economic Policy Symposium > Chairman Bernanke Signals No QE3 > USD Gains
Federal Reserve Chairman Ben Bernanke’s much awaited speech on current and longer-term economic conditions in the United States failed to meet market expectations, as it appeared that further easing had been priced in over the past few days. Indeed, as market participants’ bid riskier assets higher, such as the commodity currencies and equity markets over the past week, it became increasingly clear that the Federal Reserve would not embark on a third round of quantitative easing, yet.
Federal Reserve Bank of New York President William Dudley hinted last Friday that policymakers believed the economic climate in the United States was improving, despite recent data releases, making it unnecessary for further stimulus. He noted, “Some of the weakness in economic activity in the first half of the year was due to temporary factors…[T]hese restraining forces have abated and thus, we should see stronger growth in the second half.” As such, today’s signal – or lack thereof – should have been expected.
In terms of the near- and longer-term prospects for the U.S. economy, Chairman Bernanke noted that “there have been some positive developments over the past few years, particularly when considered in the light of economic prospects as viewed at the depth of the crisis,” while also pointing out that “a cyclical recovery, though a modest one by historical standards, is in its ninth quarter.”
In regards to American fiscal policy, which has come under scrutiny given the incredible stress placed on markets following a strenuous debt ceiling debate, Chairman Bernanke laid out the following recommendation:
“Fiscal policymakers can also promote stronger economic performance through the design of tax policies and spending programs. To the fullest extent possible, our nation's tax and spending policies should increase incentives to work and to save, encourage investments in the skills of our workforce, stimulate private capital formation, promote research and development, and provide necessary public infrastructure. We cannot expect our economy to grow its way out of our fiscal imbalances, but a more productive economy will ease the tradeoffs that we face.”
Chairman Bernanke also made the following remarks worth pointing out:
- “In the financial sphere, the U.S. banking system is generally much healthier now, with banks holding substantially more capital.”
- “Credit availability from banks has improved, though it remains tight in categories--such as small business lending--in which the balance sheets of potential borrowers remain impaired.”
- “In the broader economy, manufacturing production in the United States has risen nearly 15 percent since its trough, driven substantially by growth in exports.”
- “It is clear that the recovery from the crisis has been much less robust than we had hoped. From the latest comprehensive revisions to the national accounts as well as the most recent estimates of growth in the first half of this year, we have learned that the recession was even deeper and the recovery even weaker than we had thought; indeed, aggregate output in the United States still has not returned to the level that it attained before the crisis.”
- “Importantly, economic growth has for the most part been at rates insufficient to achieve sustained reductions in unemployment, which has recently been fluctuating a bit above 9 percent.”
- “Accordingly, growth in the second half looks likely to improve as their influence recedes.”
- “Monetary policy must be responsive to changes in the economy and, in particular, to the outlook for growth and inflation.”
- “We expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most Committee participants view as being consistent with our dual mandate.”
The Chairman of the Federal Reserve concluded his diatribe on monetary policy with the following statements, indicative of no further quantitative easing, for the time being, although low interest rates would continue to be deployed, among other potential tools:
“In light of its current outlook, the Committee recently decided to provide more specific forward guidance about its expectations for the future path of the federal funds rate. In particular, in the statement following our meeting earlier this month, we indicated that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. That is, in what the Committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years.”
“In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus…The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.”
Written by Christopher Vecchio, Currency Analyst
To contact the author of this report, please send inquiries to: firstname.lastname@example.org
Follow Christopher Vecchio on Twitter: @CVecchioFX
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.