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Jackson Hole Central Bank conference

Jackson Hole Central Bank conference

29.8.2011 9:29

1) Bernanke
Bernanke did not announce new measures to stimulate the economy and to calm markets. He didn’t sound too pessimistic about the economy, certainly not in the long term and even not in the short term. He still thinks that the classic virtuous circle that always pulls the economy out of recession is still at work. Pent-up demand combined with easy monetary and fiscal policy is met by increased production and hiring. This creates more income and business revenues, improving the balance sheets and making households and businesses more creditworthy, facilitating lending. However, the combination of a housing slump and financial crisis has acted to slow the natural recovery process. Bernanke sounds also rather optimistic about the long term growth prospects, as he doesn’t believe the current problems have fundamentally lowered the long term growth potential.

However, Bernanke acknowledged that the economy slowed recently more than anticipated and sees downside risks. He devoted only a surprisingly short part of the speech on the outlook for policy. “Monetary policy must be responsive to changes in the economy and more in particular to the outlook for growth and inflation”, he said. However he finely referred to the August FOMC statement where the Fed said that it is most likely that the FF rate will be kept at the current very low levels until at least mid 2013. This might be why he didn’t announce or explicitly suggested new measures. So short after these measures had been taken, additional measures might have looked as panic. However, as expected and maybe triggered by the current market stress, Bernanke added that the Fed has a range of tools available that could be used to provide additional monetary stimulus. Thereafter, he suggested that these tools may be used soon by announcing that the September FOMC meeting would take two instead of one day. At that meeting, the situation would be assessed and the pros and cons of the additional tools would be further discussed. We think it is still too early for a full-scale QE-3 programme (inflation-fiscal mess), but some minor easing might very well be decided at this meeting like a lowering of interest rate on excess reserves or more likely reinvestment of maturing MBS paper into long term Treasury paper of a limited switch of ST Treasury paper into longer term one.

Bernanke was also very straightforward by urging Congress to take measures for fiscal consolidation, but by taking care that they don’t weigh on the current difficult economic situation. In other words, taking structural measures that will have their effect in the longer term, but that don’t weigh on the economy short-term. It could even be seen as an approval for (future) ST fiscal stimulus that is currently under examination by the Obama administration. He was critical on the handling of the debt ceiling issue and proposed to improve the process of fiscal decision making.

2) Trichet

ECB Trichet, who will soon finish his mandate at the ECB, spoke of setting priorities for long term growth. He compared growth patterns in the euro area and US, stressing that per capita GDP was nearly identical (1%) since the start of EMU. He also showed that the dispersion of growth inside EMU was similar on the dispersion inside the US. The big disappointment came in the part of the speech where he called structural reform, attention for internal and external imbalances and a greater flexibility on the part of policy institutions as the priorities for policymakers. His remarks on one and two were plain vanilla. When he spoke about the need “our policy institutions remain attuned to the ever-changing landscape” he referred to the ECB liquidity measures at the onset of the crisis and swap agreements, as well as the separation principle the ECB has invented between their standard and non-standard policies. He didn’t elaborate on the fault lines in the euro construction though, notably the absence of united fiscal policy and was silent about the ECB bond purchase programme and the role of EFSF.

So, he missed the great opportunity to give his opinions on the real stuff that bothers markets (ands policymakers) and that nurtures a growing unease about the longer term viability of the euro area in the current form.

3) Lagarde

The new IMF head, Ms Lagrade stole the show by being very straightforward in her comments, a sign that the IMF takes its role as global watchdog serious. She urged policymakers to take the current crisis very serious and warned for misplaced complacency. She asked policymakers to take immediately care of the long term fiscal sustainability, but without jeopardizing the fragile recovery. For the US, she advised to take measures to heal the housing sector, while the European leaders were advised to take care of their banks that need a recapitalization, eventually via the EFSF (public funds). Her remarks were immediately criticized by the banking sector that pointed out that Lagarde had it wrong: liquidity not solvency was the problem they said. Trichet in a comment said the ECB had taken care of the liquidity problem. Lagarde was also critical towards the monetary policy, especially in the US.

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