30th August 2012
This Reuters piece shows the market tension ahead of the speech.
Yet, previous speeches by Bernanke do not give cause for optimism; 2010 paved the way for quantitative easing, but did not formalise it. Economist Michael Hanson said of the 2011 speech: "Mr. Bernanke's speech at Jax Hole '10 has been blown out of proportion by revisionist history. The Fed chair didn't promise QE2 in that speech, Mr. Hanson notes, but rather said the Fed was ready to act if things got worse. Today's speech wasn't much different, he argues…" Hanson concludes that the Fed's actions have tended to be more a symbolic show of support to the economy than an attempt to drive financial flows.
Bernanke has shown himself increasingly uncomfortable with continued stimulus. Jim Paulson said in yesterday's Financial Times that the Federal Reserve's unease with further quantitative easing may be a recognition that it is unlikely to promote further growth:
"Unlike the ECB, the Fed has been in persistent easing mode since the 2008 recession. Only recently, and despite the 2012 US economic soft patch and renewed eurozone fears, has the Fed seemed somewhat reluctant to undertake yet another round of quantitative easing. Why? Could it be because it realises it is "effectively" out of bullets? With $1.5tn in excess US bank reserves, is anyone really suffering from a lack of liquidity? And, with record low mortgage yields, who is being held back by oppressive interest rates?"
If US central bankers are out of bullets, what about politicians? It is difficult to extract myth from reality in an election year: Paul Ryan is promising a ‘turnaround' for the US economy if he and Romney are elected, promising 12 million American jobs in its first term and a cap on federal spending at 20% of gross domestic product, but a politician looking for election is unlikely to admit that he may not be able to change the course of an economy. Certainly, the course of American growth seems to have been determined more by speedy monetary easing and the natural vibrancy of the economy than any concerted action by President Obama.
Can Europe's policymakers make a difference?
But, if policymakers are limited in their influence in the US, does it follow that Eurozone policymakers will be similarly unsuccessful? Should the recent optimism around ECB bond buying, for example, be dismissed? In Europe the situation appears a little different. It started monetary easing later and so there is perhaps more justification for the optimism that ECB bond buying will ‘do the trick' to turn around growth. Draghi plans to intervene in government bond markets , despite the Bundesbank's reluctance.
The intervention may be considered a success if it simply instils sufficient confidence to keep borrowing costs in peripheral Europe lower. The issue was never as profound in the US, which had a captive market for its bonds thanks to the dollar's position as a reserve currency. Early signs are that policy intervention has worked to keep borrowing costs low: "Reflecting optimism over possible ECB intervention, Italy's borrowing costs were sharply lower on Wednesday at an auction of six-month bills. Meeting Mario Monti, Italy's prime minister, in Berlin on Wednesday, Ms Merkel said Italy's reform agenda was "impressive" and should be "continued and implemented step by step" says the FT.
Equally, an article in Der Spiegel yesterday suggested that austerity measures were having an impact: A study by the Association of German Chambers of Industry and Commerce (DIHK), commissioned by the Financial Times Deutschland newspaper, showed that the countries in crisis are becoming more competitive, based on two key indicators: "Unit labor costs have fallen significantly in Greece, Ireland and Spain. Labor costs particularly fell in Greece, dropping by about 15 percent since 2010…
"Deficits in national current accounts – the difference between the value of exports and imports of goods and services – are also shrinking in most countries. The report revealed that Greece reduced its current account deficit by 54 percent between 2008 and 2011. The country's exports have regained the level they had in 2007, even though the Greek economy has contracted by 27 percent since then."
Markets should not expect too much from Bernanke, however much the US economy might appear to need it – see Shaun Richards on Bernanke's dilemma here. Bernanke recognises that there are limitations to central bank influence. Nevertheless, there is still a chance that European central bankers and policymakers can change the course of events in the Eurozone, simply by keeping borrowing costs at manageable levels. This suggests that the eyes of global economists should be on Draghi, rather than Bernanke.
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