Federal Reserve Chairman Ben Bernanke offered reassuring words, but no action, in his annual speech at Jackson Hole, Wyo., on Friday.
The speech went exactly as most analysts expected. Markets fell slightly after the text of the speech was released, but quickly pared losses.
Bernanke sought to calm jittery markets as he failed to provide the news they were hoping for: new monetary policies to boost an economy that seems to be hovering on the brink of a double-dip recession. The Fed chair said he expects a moderate recovery that will gain strength over time.
With respect to long-run growth prospects, Bernanke said his view was “more optimistic.” The shocks of the past four years did not appear to have altered the country’s growth fundamentals, he said.
The Fed chair also sought to put in perspective the recent string of disappointing economic indicators, such as data showing persistent weakness in the housing, by highlighting some big-picture good news: The global economy has grown in the last few years, the U.S. economic recovery is in its ninth quarter, the country’s banking system is generally healthier, and structural reforms to the financial sector are underway.
The Fed expects growth to pick up in the second half of 2011 as the lingering effects of higher commodity prices and the Japanese earthquake and tsunami on global-supply chains dissipate. The central bank also expects inflation to settle at mandate-consistent levels at or under 2 percent in coming quarters.
Despite his reassuring words, Bernanke also showed how far the recovery—which he said was “much less robust” than the Fed hoped—has to go. The slow, erratic nature of the recovery can be attributed to the extraordinary severity and scope of the recession as well as the financial crisis and large slump in the housing market, which together have slowed the natural process of recovery, he said.
As expected, Bernanke left the door open for future Fed action. He said the policy-making Federal Open Market Committee would meet for two days, rather than the typical one, in September to give adequate time for discussion of policy options. Bernanke reiterated the FOMC’s statement earlier this month that the Fed is weighing the policy tools available to it and would use them “as appropriate.”
He mentioned some specific ways the U.S. could boost its current recovery. Proactive housing policies could help the housing sector stabilize and grow more quickly. A better process for fiscal decision-making could prevent a repeat of the summer’s debt-ceiling debacle, which could make investors less willing to hold the country’s financial assets or invest in U.S. businesses.
Bernanke said there was an urgent need to alleviate the current high level of long-term unemployment, the lingering effects of which could be a “major scar” following the economic recovery.
But, overall, he remained optimistic about the economy's ability to bounce back--so long as policy makers act appropriately.
“I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if—and I stress if—our country takes the necessary steps to secure that outcome,” he said.