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Five lessons from Bernanke’s Jackson Hole speech

US Fed chairman Ben Bernanke may have disappointed investors in his speech today, but he did provide some lessons in a potted history of the US central bank’s response to the financial crisis.

Five lessons from Bernanke’s Jackson Hole speech

At best, ‘nothing new’; at worst, a ‘snoozefest’. Either way, close watchers of US Federal Reserve chairman Ben Bernanke were left unimpressed by the central banker's speech at Jackson Hole today.

Rather than a clear signal that Bernanke would imminently unleash a third round of quantitative easing ('QE3', or the buying of government bonds to reduce long-term interest rates), the best they got was an echo of previous comments with the pledge that ‘the Federal Reserve will provide additional policy accommodation as needed’.

However, Bernanke’s 4,500 word potted history of the response of the Fed's Open Market Committee (FOMC) to the financial crisis wasn't entirely sleep-inducing, providing a handful of lessons on the success – or otherwise – of policy in the world's largest economy.

1) QE works

The Bank of England says it; so does Bernanke.

Drawing on research, he concludes that asset purchases ‘significantly lowered’ long-term Treasury yields and ‘boosted’ stock prices.

He admits that ‘obtaining precise estimates of the effects of these operations on the broader economy is inherently difficult,’ but concludes that the Fed has achieved something ‘economically meaningful.’

In fact Bernanke mentions the Bank of England’s own success – a controversial conclusion drawn by the British central bank’s own staff – in supporting his argument.

2) So does policy by speech

When there just isn’t enough ink left in the printers, central bankers use the gift of the gab or ‘forward guidance’. It’s what European Central Bank chief Mario Draghi did over the summer, promising to support the euro, and thereby managing to keep things together while his political masters were on holiday.

Bernanke said: ‘the committee's forward guidance may have conveyed a greater willingness to maintain accommodation than private forecasters had previously believed. The behavior of financial market prices in periods around changes in the forward guidance is also consistent with the view that the guidance has affected policy expectation.’

3) But it hasn’t fixed unemployment

In the UK, it’s baffling that the labour market is so (relatively) strong; in the US, economists are bewildered as to why it’s so weak. ‘In light of the policy actions the FOMC has taken to date, as well as the economy's natural recovery mechanisms, we might have hoped for greater progress by now in returning to maximum employment,’ Bernanke said.

‘The economic situation is obviously far from satisfactory,’ he admitted, partly owing to weak housing activity, uncertainty about fiscal policy – not least the fiscal cliff – and stresses in markets.

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9 comments so far. Why not have your say?

William Bishop

Aug 31, 2012 at 19:04

Not surprising that markets don't seem to know quite what to make of this. Maybe there are hints that Bernanke has some doubts about diminishing returns from successive rounds of QE (or am I only looking for him to confirm my own opinion?). The Fed is often reluctant to change policy ahead of presidential elections, so the choice may be between action at the next meeting or nothing until December. I would rate the chances of some early action at about 2:1 against.

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J Michael Younger

Aug 31, 2012 at 19:29

I have often thought that the money system is now very much akin to an electrical system with generators, resistors, capacitors, voltage and so forth.

In such a system there is an obvious need for the current and voltage to be kept healthy for the system to function. Clearly we have had the hell of a thunderstorm and the need to resolve the reverberations is paramount and an

inexact science as nobody has laid out the analegous theory of such a system as yet to my knowledge. Guess we will get there eventually by a hot or miss process the spokes persons of which we witness such as Bernanke today!

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joe stalin

Aug 31, 2012 at 20:06

Bernanke pretty much said what was expected it is just that the algos did not read the entire text or especially the last line which is where the great orator always puts what is important. Blame the programmers. The mrket eventually saw what it wanted to see and hey presto we are a percent. Ben will do what needs to be done and so will Mario. But looking at the markets behaviour today is it any wonder the money does not want come in when algorythms, HFT, dark pools insider trading front runnng and pump and dump (Facebook) are the order of the day?

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Sep 01, 2012 at 00:47

So long as we all carry on believing that 2+2=5 or any number you fancy its all going to be fine! but sooner or later the proverbial little boy will pipe up and say "Excuse me but the Emperor is naked, he's NOT wearing any clothes not so much as a stitch!" "How DARE you say this" the Emperors men will reply. "The Emperor's clothes which we have made for him with such care are wondrous indeed to behold and it takes a very special boy to see this and to prove it we say so once,twice and thrice (or in our special technical magical language QE1, QE2 and QE3) and theres an end to it." The little boy backs away bemused and troubled but he knows what he saw and equally he realises nobody wants to know!

This fairy tale still has a chapter or two left to run. Enjoy it while it lasts...but all you fine people posting your clever and not so clever comments should try taking a really close look at what the Emperor's men have been doing for the past 5 years or so and in reality rather longer - we pay the Pipers so very well indeed but alas we don't call the tune, even now they can't believe how they continue to get away with it..

Mad? Of course I am!?

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Sep 01, 2012 at 08:03

So Reckoner. Do we sit tight with funds and shares, or is the cliffe edge approaching.... when is it time to sell off everything and await Armageddon

i,.e time to say "Armageddon outta here" ?

Watching funds dropping 30% + yet still getting starts in Wealth 150s is no fun, and at 62 I dont have 10 years to await recovery. I am still quite heavily in gold as those promises to pay the bearer bits of paper seem to be about to lose value again, but still in the market.

So are you in or out, or about to get out???

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Sep 01, 2012 at 17:27

All we need now is for China to present their holdings of US Treasury Bills for payment in GOLD. That will sort out the system once and for all. Bring it on. Tsunami first then peace and quiet. Rather, reality.

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Sep 01, 2012 at 21:54

Banjofred - in reply - Japan (more or less. Steady state economy not much growth. Ftse down to 3000'ish for a generation or two. Real estate as well by 2020. We all work to 70-75 and save hard just ahead of near zero inflation. Get some gold too.Don't expect silly pension growth of 6/7% until the debt is finally squeezed out or defaulted on as appropriate. La La La nobody's listening (yet). Hey ho talking about debt reminds me I'm off to Greece tomorrow for a couple of weeks!

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Sep 02, 2012 at 09:22

Reckoner, all sensible suggestions, especially 2 weeks in Greece.. I like Georges idea above that China asks the USA (who promise to pay the bearer on demand...) to pay up in GOLD.

I dont like your suggestion of FTSE at 3000. Ouch

Time is the best friend of the young (but they wil stupidly repeat the errors of previous generations of course). I am 62 so have say 3 years to build my pot further, or at least avoid losing a big chunk,

If I were younger I would seriously look at putting more than 5% of the pot in Gold, parlty in gold sovereigns with no capital gains. - the earlier ocmment of someone that gold does nothing amazes me - what else has gone from $270 to £1670 and has been a measure of value for thousands of years.?

you cant earn divdends on gold, but as it now costs in excess of $1400 to extract from the ground, it is hardly likely to tumble lower than that..

The FTSE etc is just la la land.

I have moved a lot of my portfolio out of funds and into cash, ready for the crash. I still have a BIG chunk in Troy Trojan, which is heavily into gold and bonds, and a few major firms, and it has not fallen more than 4.5% in its lifetime.

If anyone has any suggestions of a next move, I will be pleased to hear them

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Sep 02, 2012 at 09:26

Why worry if you are in or out of the market when it can all fall apart.

What use is money when it all it is is an IOU issued by a probably insolvent bank propped up by a bankrupt government.

What can be worse than money when it has been so defiled

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