NB – there will be no update on Monday
Bernanke didn’t surprise with respect to expectations for immediate action, but he did make a couple of very interesting points:
- LSAPs also appear to have boosted stock prices, presumably both by lowering discount rates and by improving the economic outlook; it is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC’s decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions.
So Bernanke official acknowledges that stock prices is a sizable factor in FOMC decisions, but importantly appears to believe that stock prices have a measurable impact on consumption. As regular readers know, I noted on Wed that the literature on that is fuzzy at best. In fact, the SF Fed found that financial wealth had a negative effect on consumption elasticity! Bernanke’s belief in the importance of stock values suggests that he could possibly push for more QE even with very low treasury yields because of its effect on stock prices. If so, that is very very important. He also said:
- A third cost to be weighed is that of risks to financial stability. For example, some observers have raised concerns that, by driving longer-term yields lower, nontraditional policies could induce an imprudent reach for yield by some investors and thereby threaten financial stability. Of course, one objective of both traditional and nontraditional policy during recoveries is to promote a return to productive risk-taking… a stronger recovery is itself clearly helpful for financial stability. In assessing this risk, it is important to note that the Federal Reserve, both on its own and in collaboration with other members of the Financial Stability Oversight Council, has substantially expanded its monitoring of the financial system and modified its supervisory approach to take a more systemic perspective. We have seen little evidence thus far of unsafe buildups of risk or leverage,
So – Bernanke acknowledges that QE pushes investors further out on the risk spectrum, but claims that because this helps the recovery, it’s actually helpful for financial stability. This isn’t always true – did higher housing prices help financial stability in 2007?!? Furthermore, Bernanke expects that the Fed will be able to proactively limit excessive risk taking, even though it completely missed the housing bubble and continues to insist that there was little it could have done to prevent it!!
The view here over the past few years has mostly been supportive of Bernanke’s actions so far, but his statements today appear to extrapolate on some very shaky hypotheses. Quantitative Easing, like any other policy mechanism, has a point of rapidly diminishing marginal return. The view here is that the evidence suggests we are either already at that point or past it. (Updates this entire week have gone over that) It is surprising and disappointing that Bernanke is either ignoring or discounting the evidence. His statement today suggests that additional QE is very likely in the coming months, current yield levels and the weak economic impact not withstanding, simply because Bernanke doesn’t see much downside.
How does this affect the outlook for September? Seasonality is pretty negative for risk assets in September, and this seems well noted this year. But the data in the US looks unlikely to get worse over the near term. The rough June and July for the US economy has not tipped the US into a recession, which means that the near term recession risk is by now quite low. Of course, Europe is, and will be a risk for a long time. And the worsening German data is in particular a concern. But given the still wide-spread skeptical attitude toward better data globally, the balance of risks appears to point upward for risk assets. And even if there isn’t, there’s the Bernanke put…
- Italy unemployment declined to 10.7% in July vs 10.9% exp and 10.8% prev.
- Canada GDP rose 2.4% YoY thru June vs 2.2% exp and 2.4% prev
- Sun: South Korea PMI, China Non-Mfg PMI, HSBC Mfg PMI
- Mon: US Labor Day, ItalyMfg PMI, Brazil Mfg PMI
- Tues: EU PPI, US Markit PMI, ISM, China HSBC Service PMI
- Wed: Italy Services PMI, UK Service PMI, US Labor Costs, BoC