Fed Chairman Bernanke: Prepared To Adjust Portfolio (CODENAME: QE3?)


(US) Fed Chairman Bernanke: Reiterates Fed prepared to adjust portfolio holdings as appropriate to foster growth –  (Prepared Speech)

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  • Resource slack in labor and product markets may continue to restrain inflationary pressure
  • Fed remains prepared to take action to protect financial system and the US economy assuming increased stress from crisis
  • Highlights that banking and financial conditions have improved significantly
  • Sees need for policymakers in Europe to do more to stabilize the EMU banks and calm market fears
  • Stronger gains in economic activity may be required to improve labor markets
  • EU crisis acting as a drag on exports and has weighed on business and consumer confidence
  • Severe fiscal tightening may be significant threat to recovery; preventing sudden contraction will help the movement towards full employment
  • Economic growth to continue at moderate pace

(US) Fed Chairman Bernanke: key question for the Fed is whether growth will be strong enough to make further progress on lowering unemployment – (Q&A)

  • To see improved unemployment levels, growth must be above trend; if growth remains near potential 2%, unemployment improvement could be limited going forward, and that’s “something we need to think about.”
  • Expiration of the tax cuts is the single biggest part of the “fiscal cliff,” and would have an negative impact in the short term despite any potential long term benefits; even if all the other issues were held constant.  Congress needs to consider addressing the automatic budget cuts that are required by the “sequester.”
  • Fed has a number of different options and nothing is off the table.  If Fed determines that more action is needed it will consider the costs and benefits of all available options.
  • Need for dollar swaps seems to be declining but the Fed dollar swap arrangement was very helpful.
  • US and Greece are completely different economies but the US cannot become complacent
  • US must reach a sustainable fiscal path over the long term.  US should focus on strengthening our own economy, which will make us better able to withstand external shocks.
  • European crisis has waxed and waned over time with stresses rising pretty significantly in the last two months.
  • Past QE programs have shown to increase equity prices; bring down interest rates; reiterates there may be “diminishing returns” from an additional QE program.
  • Housing market appears to be stabilizing.
  • Fed does not keep rates low for the sake of fiscal policy.  Would think large deficits give Congress plenty of motivation to deal with fiscal policy.
  • Incredibly important to end ‘too big to fail.’  Would be best if market forces motivated banks to downsize themselves.

How to interpret this speech?

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Fed Chairman Bernanke has once again dazzled Capital Hill and avoided to provide any answer to the pressing question of QE3.  However, it does seem that recently Bernanke and other Fed officials are considering the possibility of another round of Quantitative Easing, which is a contrast from their prior comments that often called QE3 as “highly unlikely”.

In today’s testimony, Bernanke stated that unemployment improvement could be limited if growth remains near potential 2% (1.9% GDP y/y from Q1 2012), and it is “something we need to think about”, and continued to say that nothing is off the table although at this time both European and Chinese economies have slowed down, along with the “fiscal cliff” of the tax cut expiration in the U.S looming over the market…

I believe market is definitely disappointed after the testimony as Bernanke did not explicitly call for QE3, but with the acknowledgment of global economic slowdown and the reiteration that the Fed has several options, Bernanke could be hinting for some kind of Fed action in the future…

 

 

 

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Comments

  1. Divinegift says:

    Please what will be the position JPY since Spain are coming out for bailout,will JPY still be selling ?

  2. Henry you must be changing the lives of many people . Your good advice is only exceeded by your magnanimous spirit .
    Best wishes and God bless !
    Garth

  3. Thanks so much Henry, your news analysis is fhe best among others.
    God bless you.

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  1. […] of U.S. economic recovery as indicted by the string recent less than forecasted economic data.  Bernanke testified in front of Congress on June 7 in response to the current economic conditions a…: “… Key question for the Fed is whether growth will be strong enough to make further […]

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