Odds tilt in favor of Fed move in September

September 2, 2012

By Greg Robb, MarketWatch

Jackson Hole, Wyo. (MarketWatch) — The big question going into Jackson Hole on Friday was whether Fed Chief Ben Bernanke was ready to take the plunge and approve a third large round of asset purchases as soon as the next policy meeting in September.

The answer coming out of the Jackson Hole retreat on Saturday appears to be that the odds are slightly tilted in favor of a move in two weeks.

While Bernanke cast his lengthy speech at Jackson Hole as a dispassionate view of the pros and cons of unconventional policy and, as such, included language that would satisfy both proponents and opponents of more action, a lot of analysts saw his thumb on the scale tilting toward more quantitative easing.

“We do not think the Jackson Hole speech provided any reason to deviate from our view that the Fed is likely to launch either open-ended QE or a plain-vanilla QE program in September,” said Jeremy Lawson, an economist at BNP Paribas in New York.

In his remarks, Bernanke called the stagnation in the U.S. labor market “a grave concern.” And he dismissed the concerns of critics who worry quantitative easing would rekindle inflation and distort financial markets.

“The costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant,” Bernanke said. “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger recovery and sustained improvement in labor market conditions in a context of price stability.” See text of Bernanke’s speech.

Bernanke’s statements are fully consistent with our view that another round of easing is coming at the September 12 meeting,” said Paul Edelstein, director of financial economics at HIS Global Insight.

But the balanced approach Bernanke struck did make him appear cautious to participants at the Jackson Hole conference.

Proponents of more Fed easing hope the caution is simply a desire to get the entire Federal Open Market Committee behind Bernanke before he moves in September.

On the other hand, the caution gives opponents hope that the Fed chairman is willing to at least delay asset purchases for a few months.

“I don’t think there is much the Fed can achieve, which doesn’t mean they won’t try to do something,” said Harvard economics professor Martin Feldstein, who argued that Bernanke should just “stand pat.”

To read more, visit: http://www.marketwatch.com/story/odds-tilt-in-favor-of-fed-move-in-september-2012-09-01

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