Mohamed El-Erian, chief executive and co-chief investment officer at PIMCO, reacts to Fed chairman Ben Bernanke’s Jackson Hole speech.
In his eagerly anticipated speech at Jackson Hole, Chairman Bernanke presented an assessment of recent economic developments, the outlook, and policy implications. In doing so, he sought to recalibrate how some markets/analysts interpreted recent Fed communications, and to convey the ability of Fed policy to minimize the risk of deflation, inflation and a double dip.
What follows is a brief summary of the speech and some open questions.
1. Bernanke on US economic context:
His “unusual uncertainty” comes across in the form of a large number of qualifiers. Having said this, he does tell us his bottom line. Specifically…
On where the economy is coming from:
Overall, the incoming data suggest that the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat weaker than most FOMC participants projected earlier this year. Much of the unexpected slowing is attributable to the household sector.
On where the economy is going:
I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace.
On the drivers:
On the whole, in the United States, that critical handoff [from fiscal and inventory drivers to private final demand] appears to be under way.
And on the deflation risk:
Falling into deflation is not a significant risk for the United States at this time, but that is true in part because the public understands that the Federal Reserve will be vigilant and proactive in addressing significant further disinflation.
2. Bernanke on policy:
On what has been achieved:
The FOMC has also acted to improve market functioning and to push longer-term interest rates lower through its large-scale purchases of agency debt, agency mortgage-backed securities (MBS), and longer-term Treasury securities.
On the outlook:
We will continue to monitor economic developments closely and to evaluate whether additional monetary easing would be beneficial. In particular, the Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.
On the effectiveness and sufficiency of policy tools:
It’s an issue (“uncertainty about the quantitative effect of securities purchases increases the difficulty of calibrating and communicating policy responses.”) but not a huge one…
The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do. …The issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool.
And on the specifics:
He re-iterates three policy options…
(1) conducting additional purchases of longer-term securities, (2) modifying the Committee’s communication, and (3) reducing the interest paid on excess reserves.
…seemingly favoring the first; and he dismisses a fourth one…
…that the FOMC increase its inflation goals.
3. What Bernanke did not say, or said only timidly:
- Very few linkages to other components of macro policy—particularly fiscal and structural policies
- Very few references on what is going on in the rest of the world and how this impacts the US
- Virtually nothing on whether the US is navigating through a series of national and global re-alignments
4. Some open questions in my mind that I still worry about:
- Is the Fed trying to carry too much of the macro policy burden?
- Is the Fed under-estimating the risk of a liquidity trap?
- Does the Fed have sufficiently-effective tools at its disposal?
- Is the Fed under-estimating national and global structural re-alignments?
The writer is CEO and co-CIO of PIMCO. Some of El-Erian’s earlier commentaries for FT Alphaville are available here.