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Capital Markets

US Federal Reserve chief Ben Bernanke promised nothing in Jackson Hole speech – except when he did

Has Bernanke shied away from fleshing out a more ambitious Federal Reserve communication strategy?

Some market participants were disappointed by Bernanke's non-committal speech at the Jackson Hole shindig on Friday, with diminished expectations for further quantitative easing at the next meeting.

Others, however, were more bullish, citing Bernanke’s robust defence of the current policy course, the need for vigilance against downside risks and the “economically meaningful” advantages of asset purchases, backed by academic studies.

Others reckoned the speech pointed to more stimulus – but perhaps not imminently. In truth, with the US Treasury forward-rate curve at the short-end at zero, there is no way to gauge market expectations over Fedspeak. He offered no timetable for action, ahead of the September 12 meeting. Net-net, who knows.

Nevertheless, there is one take-away to consider. As we have reported, Randall Kroszner, a former board member of the Federal Reserve, told Euromoney, ahead of the August meeting of US central bankers, that the Fed should publicly communicate the economic conditions – tied to employment or growth targets – in which it will loosen monetary policy further to arrest sagging market confidence.

Here’s what Kroszner told us


Being much more explicit about the employment and inflation rate that would induce the Fed into action would help to reduce uncertainty and fits very well with the steps the chairman has already taken, including the creation of an inflation target. He said more communication would boost risk-taking, domestic confidence and business investment.

And here is what Bernanke said on Friday:


Clear communication is always important in central banking, but it can be especially important when economic conditions call for further policy stimulus but the policy rate is already at its effective lower bound. In particular, forward guidance that lowers private-sector expectations regarding future short-term rates should cause longer-term interest rates to decline, leading to more accommodative financial conditions. The views of committee members regarding the likely timing of policy firming represent a balance of many factors, but the current forward guidance is broadly consistent with prescriptions coming from a range of standard benchmarks, including simple policy rules and optimal control methods. Some of the policy rules informing the forward guidance relate policy interest rates to familiar determinants, such as inflation and the output gap. But a number of considerations also argue for planning to keep rates low for a longer time than implied by policy rules developed during more normal periods.

These considerations include the need to take out insurance against the realization of downside risks, which are particularly difficult to manage when rates are close to their effective lower bound; the possibility that, because of various unusual headwinds slowing the recovery, the economy needs more policy support than usual at this stage of the cycle; and the need to compensate for limits to policy accommodation resulting from the lower bound on rates.



Bernanke then goes on to talk about the virtues of forward-rate guidance, rather than a more elaborate communication strategy, tied to employment/inflation targets. It perhaps looks like Bernanke is shying away from this policy for now.


After all, the speech was very QE-focused – with a strong indication he thinks fears over the market-impairing impact of asset purchases are overdone. In other words, if the Fed was going to innovate its communication strategy, Bernanke would have opened up about it, given the very spirit of the policy.

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